Is Now the Time to Buy Diageo?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Diageo (DGE -1.33%) (DEO -1.15%) to determine whether you should consider buying the shares at 1,790 pence.

I am assessing each company on several ratios:

Price/earnings: Does the share seem a good value when compared against its competitors?

Price/earnings growth: Does the share seem a good value factoring in predicted growth?

Yield: Does the share provide a solid income for investors?

Dividend cover: Is the dividend sustainable?

Let's look at the numbers

The consensus analyst estimate for next year's earnings per share is 103 pence (10% growth), and the forecast dividend per share is 48 pence (10% growth).

Trading on a projected P/E of 17.6, Diageo appears cheaper than its peers in the beverages sector, which are currently trading on an average P/E of around 23.8. Unfortunately, Diageo's P/E and double-digit near-term growth rate give a PEG ratio of about 1.8, which implies that the share price is overpriced for the near-term earnings growth the firm is expected to produce.

Diageo offers a 2.4% yield, which is about the same as the beverages sector average. However, Diageo has a three-year compounded dividend growth rate of 14%, implying that the payout could soon overtake that of its peers.

Indeed, the dividend is more than two times covered, giving Diageo plenty of room for further payout growth.

Strong historical growth -- but is this sustainable?
Despite Diageo's strong historical growth, I cannot see any signs of the company slowing down. You see, although Diageo has reported slowing sales demand within Europe and the U.S., the company has experienced increasing sales on all other continents. Indeed, in this year alone, sales in Africa grew 11% following 9% growth last year.

In addition, the majority of Diageo's growth during the past few years has been driven through acquisitions. For instance, in November, Diageo became a 53% shareholder in United Spirits -- India's largest drinks company.

Unfortunately, Diageo is currently having some bad luck with its acquisitions. In particular, I have discovered that Diageo's investment in United Spirits is being stalled by regulations within India. In addition, Diageo's attempt earlier this year to buy Mexican tequila specialist Jose Cuervo failed, and a 25-year-old distribution agreement between the two companies broke down as a result.

Nonetheless, the company is also focused on organic growth. Indeed, Diageo has announced this year a 1 billion pound investment to increase its production of Scottish Whisky -- a market Diageo believes will grow 50% over the next 10 years.

So overall, based on Diageo's prospects for future growth and its current discount to its sector peers, I believe now looks to be a good time to buy Diageo at 1,790 pence.

More FTSE opportunities
As well as Diageo, I am also positive on the FTSE shares highlighted in "8 Dividend Plays Held By Britain's Super Investor." This exclusive report reveals the favorite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012. The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.