E Diageo Is Not That Strong Of An Investment Right Now

With shares of Diageo (DEO) down 11.8% from their 52-week high it is a great time to investigate what is going on with this stock that is in a personal correction. Diageo has been quite profitable for some investors over the past five years as the stock is up 22.7% in that timeframe, but it has been edging ever so slowly downwards since its peak in late 2013 as seen from the chart below. Not a good showing against an S&P 500 that has nearly tripled the returns over Diageo. Overall these vice stocks are great to hold during a recession because they continue to hold their own as the economy moves downwards, but it is important to examine the specific valuation, financial and technical situations of Diageo to see what is really going on with the stock.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 23.94, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 16.83 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (2.11), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 11.35%. The company also has great near-term future earnings growth potential with a projected EPS growth rate of 11.35%.

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 3.55% with a payout ratio of 85% of trailing 12-month earnings while sporting return on assets, equity and investment values of 8.2%, 28.3%, and 13.1%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 3.55% yield of this company is good enough alone for me to take shelter in for the time being.

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Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I ...

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Comments

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Joe Economy 3 years ago Member's comment

Thanks for your interesting analysis of this alcoholic drinks producer. You mentioned that the 3.5% dividend yield is enough reason to buy this stock. I would be wary of that. Higher dividends are not always the best thing for an invester. Why? Because companies with lower dividends means that they are injecting profits back into the company rather than sharing the profits with shareholders. What factors are more important are if this company can remain competitive in a highly competitive consumer market place. Is there growth potential in the long term? How will the weakness of the British pound affect export revenues for this British company?

Ayelet Wolf 3 years ago Member's comment

I'm a firm believer that stocks like $DEO will do well during turbulent times and I think the next 4 years will be fraught with turmoil, regardless of who wins the election. But I haven't been happy with $DEO to date. What other sin stocks would you recommend instead?

Abba's Aces 3 years ago Author's comment

Thanks for reading AW... I haven't been looking at any other sin stocks per se but will let you know when I come across one!

Craig Newman 3 years ago Member's comment

Some interesting fundamentals here. But what does #Diageo do? Never heard of the company and that would have been good to mention in the article. I'm very particular about my vices :)

$DEO

Dick Kaplan 3 years ago Member's comment

Craig Newman, you've never heard of #Diageo?? They a global leader for alcoholic beverages. Easy enough to do a search, but you can learn more here: http://www.diageo.com/

Great article and thanks for bringing my attention to $DEO. Definitely worth taking a closer look.

Abba's Aces 3 years ago Author's comment

Thanks for reading CN and DK!

Gary Tanashian 3 years ago Contributor's comment

Glad to see a writer who highlights the losers along with the winners. Nice article and thank you for the integrity. BTW, that is some pretty good diversity in your port.

Abba's Aces 3 years ago Author's comment

Gary, thanks for the compliment and for reading!

Kurt Benson 3 years ago Member's comment

I agree, a very well written piece. Welcome to the site and I look forward to reading more by you. I've added you to my follow list.

Abba's Aces 3 years ago Author's comment

Thanks for reading Kurt!