The background

Diageo is the owner of over 200 brands of alcoholic beverages. Some of the most recognisable names include Guinness, Cîroc, Smirnoff and Baileys. But persistent lockdowns have led to the mass closure of the hospitality industry, affecting the FTSE 100 firm. However, Diageo finished the last six months of 2020 with organic sales up 1%. This has largely been due to the increases in household alcohol consumption, with spirit sales up 15% in the UK alone.

What’s more, the recent announcement of the UK-US whisky tariff suspension has helped drive the Diageo share price up over 5% since the beginning of March. The four-month suspension is in place until a long-term settlement is reached.

Although this is good news, reported net sales were still down 4.5% to £6.9bn for the second half of 2020. This was reflected in operating profits, which fell 8.3% to £2.2bn. However, the company did display good cash generation, with free cash flow up from £800m to £1.8bn. This highlights what Chief Executive Ivan Menezes believes to have been a “strong performance in a challenging operating environment”.

Current Diageo share price

Competitors Heineken and Carlsberg also reported decreases in organic revenues of 11.9% and 8.4% respectively. However, Diageo is currently still sitting at a much higher price-to-sales ratio of 6.15 compared to Heineken’s 2.56 and Carlsberg’s 2.44. This begs the question, is the current Diageo share price overvalued?

While 2020 definitely hurt the Diageo share price, I still believe that it’s a good stock to buy now. People should still be consuming household beverage brands like Guinness and Smirnoff decades from now. This gives the stock longevity, an attractive quality for investment. The constant acquisition of up-and-coming brands is also attractive to me. For example, George Clooney’s Casamigos tequila operation was bought for £700m in 2017 and saw a 139% increase in sales during the last sixth months of 2020.  

The 2.3% dividend yield is also attractive, largely reflecting the slow but steady growth rate of the company. In addition to this, the global easing of pandemic restrictions is only going to boost business. The hospitality business is likely to boom in the next few years and the Diageo share price will benefit from this. However, the alcoholic beverage industry still remains highly regulated. For example, consumption is prohibited in some Indian states, a key market for Diageo. This could also affect long-term growth.

But overall, despite the recent struggle, I think the Diageo share price can keep climbing as we move closer to a post-pandemic world.

The post Will the Diageo share price keep climbing? appeared first on The Twelfth Magpie.

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Dylan Hood has no position in any shares mentioned. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should UK investors stick with the FTSE 100 firm or look overseas to alternative heavyweight brewers Heineken (NASDAQOTH: HINKF.US), and Budweiser and Stella Artois group Anheuser Busch Inbev (NYSE: BUD.US)?

Last week, SABMiller announced that finance chief Jamie Wilson had “tendered his resignation for personal reasons” and “steps down from the Board with immediate effect”.

The news came as a shock to industry watchers, although, with hindsight, there was perhaps a whiff of something in the air three weeks ago when Wilson exercised an option to purchase company shares and immediately sold the lot for a net profit of £390,318. His previous practice on such occasions had been to sell only enough shares to cover tax liabilities and suchlike.

SABMiller chief executive Alan Clark said: “I am saddened by Jamie’s departure. He has been a huge support to me over many years, first in Europe and then over the past several years as CFO”. Indeed, Wilson has been a key figure in the success of the world’s number two beer group, which today trades on a rich valuation: 21.6 times forward 12-month earnings at a share price of £36.

The principal executive directors at Heineken and Anheuser Busch Inbev (AB Inbev) have been with their respective firms for 35-plus years, and carrying out their chief exec and finance boss roles for a decade or more.

Heineken, the world’s number three beer company, trades on a forward 12-month P/E of 19.7 at a current share price of €67.22 (in Amsterdam) and $38.63 (in New York, where two Heineken US “ADRs” represent one ordinary Heineken share).

World number one AB Inbev — whose turnover exceeds that of Heineken and SABMiller combined — trades on a P/E of 22.4 at a current share price of €107.95 (in Brussels) and $123.57 (in New York).

It’s clear, then, that while there’s some variation in the P/Es, all three companies are very highly rated (the long-term average P/E of the FTSE 100, for example, is just 14). To put the current ratings into further context, when I looked at the brewers back in October 2011, the P/Es were: SABMiller 15.3, AB Inbev 13.3 and Heineken 11.9.

So, we’ve seen a hefty re-rating of the whole sector, with SABMiller benefiting a little less than its rivals.

Why are the shares of these companies currently so in demand with investors? Well, the 10% or so annual earnings growth expected from them in the next couple of years looks very attractive at a time when a lot of industries are finding growth hard to come by. Also, it appears prices have been bid up on the potential for M&A activity in the sector.

Last September, SABMiller made a takeover approach for Heineken, which was rebuffed in no uncertain terms, with the controlling Heineken family making clear its intention to “preserve the heritage and identity of Heineken as an independent company”. Heineken’s stance rekindled what has long been mooted as the obvious megadeal in the sector: namely, for AB Inbev to swallow SABMiller.

Putting it all together, I’m not convinced UK investors have much to gain from deserting the FTSE 100 brewer for one of its overseas-listed rivals at this stage. All three companies are highly rated, and there appears little prospect of their share prices appreciating much beyond the rate of earnings growth, because their P/Es surely can’t go a great deal higher.

SABMiller looks the one company that could give its shareholders an exceptional return from here, purely on the basis of a takeover bid. Boardroom upheavals often provide a fertile environment for an approach, and the shock exit of SABMiller’s finance chief might just be a catalyst for AB Inbev to swoop.

I’m not going to be buying SABMiller shares on the hope of a bid, but if I were already a shareholder, I think would be happy to stick with my investment.

The post Which Global Beer Giant Is The Best Investment: SABMiller plc, Heineken N.V. Or Anheuser Busch Inbev SA? appeared first on The Twelfth Magpie.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.