Investor Bill Miller seems befuddled. In his July 2010 commentary, he wonders why investors keep purchasing 10-year treasuries yielding about 3%, when companies like ExxonMobil offer much higher potential returns.

His formula for Exxon is straightforward: "A sum of the dividend yield, growth rate and share shrink could represent an attractive annual return even if the valuation stays the same, and the valuation is among the lowest the company has traded at in years." When you add up the components, Exxon could offer 16.4% returns per year in a low-return environment.

I'm no less baffled than Miller by investors' preference for bonds, but I do think he's on to something. To see whether more Miller-like opportunities like Exxon were out there, I looked for companies with:

  • A dividend yield greater than the 3% 10-year treasury yield
  • A five-year track record of dividend growth
  • A history of repurchasing shares
  • A P/E less than 25

Among spirits companies, Diageo (NYSE: DEO) fit the bill and stacked up well against some competitors.



5-Yr Div. Growth

Share Shrink







Brown-Forman (NYSE: BF-B)





Fortune Brands (NYSE: FO)





Source: Capital IQ, a division of Standard & Poor's.

From the table above, Diageo fits Miller's criteria perfectly. It pays a 3.4% dividend that has been growing 5.4% on average, for the past five years. The company also trades at 18.1 times earnings and produces plenty of cash flow to repurchase shares. Competitors Brown-Forman and Fortune Brands do not meet all of the criteria for our exercise

Foolish bottom line
Would Bill Miller consider investing in Diageo? It meets all the criteria above, and it could offer a 9.5% return over time -- although it will be hard for the company to maintain such a dividend growth rate. In today's low-return environment, that's pretty attractive. I don't know why the market is offering up this opportunity, but as long as it is, Diageo could be worth pursuing further.

Million Dollar Portfolio associate advisor David Meier does not own shares of any of the companies mentioned. Diageo is a Motley Fool Income Investor pick. Fortune Brands is a Stock Advisor pick. The Fool owns shares of Diageo and ExxonMobil. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy never goes out of style.