Why Diageo Shares Have Been Climbing

LONDON -- It looks like a busy week for Diageo  (LSE: DGE  ) (NYSE: DEO  ) , as it is set to release its interim results on Thursday. The shares have put on almost 60 pence from when I earmarked them as a potential buying opportunity less than two weeks ago. Here, I look at what may have caused the recent climb.

Interim results
Diageo has always said it has been confident of delivering its medium-term goals, and this week's statement is likely to confirm that the group is performing in line with market expectations. Analyst forecasts for 2012-2013 suggest organic top-line growth of 6.5%, which would surpass the company's previous 6% target.

My Foolish colleague G.A. Chester also suggests investors might see a first-half dividend of around 18.3 pence per share announced, though he warns that analyst EPS forecasts of around 103 pence give an increase of 9.3%, "representing a slight miss on the company's goal of double-digit growth."

Diageo's shares have soared 32% over the past year, while the FTSE 100 has risen just 7%. Over 10 years, Diageo's shares have risen an impressive 195%.

South Africa
On Monday, Diageo also confirmed that it had entered into a 23 million pound joint-venture agreement to acquire a 50% interest in the company that owns United National Breweries' traditional sorghum beer business in South Africa, pending consent from the South African competition authority.

The remaining 50% will be held by a company affiliated to Dr. Vijay Mallya, after announcing a "memorandum of understanding" that Diageo and Dr. Mallya would form the 50:50 joint-venture back in November.

This move presents the world's leading premium drinks business as not only a defensive share that ought to fare well during these turbulent economic times, but also as a possible play on emerging markets. 

Indeed, consumer-goods company Unilever is benefiting from developing countries as well, recently reporting that 55% of its turnover now comes from emerging markets. Both businesses look set to continue their fast growth overseas, which can only be beneficial for shareholders.

India
It hasn't been a completely rosy start to the week for the drinks major, though, as negotiations with the authorities in India about the 1.3 billion pound deal for a majority stake in Indian drinks giant United Spirits hit a snag over the weekend.

The authorities questioned whether a put clause in the agreement was compliant with Indian law and, as such, the deal may now be delayed until the second quarter of the year.

This development is worth watching, as some analysts believe that the deal is priced into Diageo's shares already, and any serious hiccup could harm their value should the worst arise.

Management
G.A. Chester has recently praised Diageo's CEO, Paul Walsh, one of the longest-serving FTSE 100 chief executives, stating that "continuity of leadership is a great foundation for long-term business success" and one of the three things he loves about Diageo.

However, rumours abound in the City that Walsh may retire in 2014, which might have a detrimental effect on the share price if that is actually the case. Currently, it is only conjecture, though, and this Thursday's statement is extremely unlikely to contain any such news.

As a shareholder, I await the results eagerly and remain confident about my investment.

Other share ideas
If you're looking for other defensive investments in the FTSE 100, I recommend the special FREE report from The Motley Fool, updated for 2013, "8 Shares Held by Britain's Super-Investor."

The report contains the names of the blue chip companies favored by Neil Woodford, whose track record speaks for itself, having beaten the Footsie by 200%-plus during the 15 years to October 2012 with a collection of dependable, defensive dividend-paying FTSE 100 names

But hurry, all Fool reports are available for a limited time only, so simply click here to have your copy delivered immediately to your inbox.

link


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2224402, ~/Articles/ArticleHandler.aspx, 10/21/2014 6:46:25 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement