LONDON -- I'm a big fan of Diageo (DGE -1.33%) (DEO -1.15%). The world's largest producer of premium spirits is a core holding in my portfolio, though I've done a little profit-taking as the stock has powered ahead -- up a third over the past 12 months.
I'm less familiar with South African-based SABMiller (LSE: SAB) (NASDAQOTH: SBMRY), though its market cap is slightly larger than Diageo after its shares are up 50% over the year. I think of it as expensive, but a quick check on my data provider shows the two shares equally rated with prospective price-to-earnings (P/E) ratios of 19.7 and yields of 2.3% for Diageo and 2.2% for SABMiller. So maybe it's time to do a little portfolio rebalancing.
Hangover
First of all, what's so good about Diageo? It ticks a lot of boxes: defensive sector, strong brands, global footprint, and emerging market growth. I like stocks that are plays on emerging market consumers. While the West is suffering a hangover from a decade of overspending, millions of people in emerging markets are acquiring a disposable income for the first time.
Diageo's really clever trick is the way acquisitions, brands, and distribution interact. The company has grown by buying local brand leaders, distributing the new brands globally while creating a new market to sell its existing brands into.
Too posh for Skegness
SABMiller is the world's second-largest brewery. It's even more of a play on emerging markets, which generate three quarters of EBITDA. Over 90% of sales come from markets where it has the highest or second-highest share. Its brand and distribution-led strategy is similar to Diageo's. It's an astute manager of brand value, ruffling feathers last month when it ruled a Skegness Hotel as too down market to stock its premium Peroni beer on tap.
SABMiller has just gone through a change of management, with the long-serving CEO who shaped the company in its present form stepping down in favor of an internal successor groomed for the job. It's the same story at Diageo, an indication of the board's confidence in management.
Valuations
SABMiller is a riskier share than Diageo. It has more concentration risk, with 40% of revenues coming from South Africa and Colombia combined. It is more dependent on joint ventures, in the U.S. and China. Governance is less straightforward, with its South African base, an interim period of combining chairman and CEO roles, and a 27% strategic shareholder.
Its vast opportunities in Africa and other emerging markets explain the equal valuations. So I think it's a reasonable share to hold at this price, but I'll keep the bulk of my play on this theme in Diageo.
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