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How Much Upside Is Left at Diageo?

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LONDON -- Global premium-drinks company Diageo (LSE: DGE  ) (NYSE: DEO  ) has been a stellar investment over the years. Does this big blue chip have much further to rise, or are its growth days over? Let's have a look.

Track record
Diageo has delivered a storming performance for investors. In the last year, its shares have risen 30%. In the last five years, the shares have doubled. However, there are signs that this huge outperformance may be over. In the last three months, shares in this super-brewer have trailed the FTSE 100. While the FTSE is up 3.9%, Diageo is only 1.1% ahead.

What cannot be in doubt is Diageo's quality as a company. Shareholder dividends have been increasing every year since 1998. In fact, the payout is up nearly fourfold in that time. Sales and earnings per share have also increased year on year for the last five years. Diageo is one of the U.K.'s most successful companies.

Go back two years, and Diageo shares were trading around 1,300 pence. The company had just completed a year in which it earned 68.3 pence per share and declared a dividend of 38.1 pence. That put the shares on a historic price-to-earnings ratio of 19 and a past yield of 2.9%. In May 2011, shares in Diageo traded at 15.7 times the full-year EPS. The 2011 dividend equated to a 3.1% yield.

Brokers are forecasting 10.7% earnings growth in 2013, followed by an 11.1% rise next year. Dividend growth is expected to accelerate: An 8.6% dividend hike is expected, to be followed by a 10.5% rise next year. Shares in Diageo now trade on a historic P/E of 21.7, with a recent yield of 2.2%. According to the broker forecasts for 2013, Diageo sells on a current P/E of 19.6 and a 2013 yield of 2.3%.

Although Diageo's profitability has improved in the last two years, its valuation has also stretched significantly. This has pushed the yield lower, undermining the shares as an income investment. The shares trade on a P/E that puts Diageo in the top 20% of all FTSE 100 companies. Forecast earnings growth, however, is about average.

Given today's bull-market conditions, I expect shares in Diageo to end 2013 about 10% higher than they are today.

Diageo's growth is impressive. However, all things considered, our team of analysts here at The Motley Fool believe that they have found a better growth prospect available today. Like Diageo, this company owns leading brands and has an impressive heritage. To find out more about this company and why it is our team's top pick, get their report: "The Motley Fool's Top Growth Share For 2013." This analysis is 100% free and will be sent immediately. Just click here to get your copy today.

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8/24/2016 12:05 PM
DGE $2138.84 Down -0.16 +0.00%
Diageo CAPS Rating: No stars
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Diageo CAPS Rating: *****