While a weak dollar and other factors hurt earnings, volume, or units sold, increased 3%; operating margins increased 0.6% to a healthy 23.9%; and return on invested capital rose 0.3% to a more than respectable 17.9%. This is the 10th consecutive reporting period with improvements in these three measures. Bravo!
Diageo trades for 17 times earnings -- and 15 times forward earnings for the fiscal year ending in June 2006. One reason for that lower-than-market average multiple is $9.3 billion in debt -- which sits at a lofty 122% of equity. For comparison, more broadly diversified competitor Brown-Forman
Although the company has $2.9 billion in cash to keep the operations purring, slow revenue growth and big debt produces anemic stock price appreciation -- such as the 3.5% the stock has increased over the last 52 weeks.
So why did Mathew Emmert make Diageo a Motley Fool Income Investor recommendation in April 2004? Besides a great dividend -- it's 4.4% now -- the company had the highest net margins in the alcoholic beverage industry. Said another way, Diageo is a fat cash cow that can grow, service its debt, and keep rewarding shareholders.
The stock was a fine pick, too. While the Standard & Poor's 500 has returned 0.2% since this recommendation was made, Diageo has returned 8.6% -- a clear showing that dividends really can matter.
The market liked yesterday's earnings news and has sent the stock up almost 2% to $57.50 a share today. That's good news. The company is still trading below the $60 per share that Emmert estimates it is worth -- and the dividend beats the returns at your local bank.
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