One thing you can be pretty sure of about booze is that it’s not going to go out of fashion any time soon. And that’s why shares in companies like Diageo (LSE: DGE) (NYSE: DEO.US) command consistently high prices — its shares, trading at 1,805p, are on a forward price to earnings ratio of 18 and are consistently rated above average.
Steady income
The big attraction for many is Diageo’s dividend. With a yield of 2.8% expected for the year ending June 2014, it might not be one of the highest on the market, but it is reliable and it grows consistently from year to year.
The annual payout is also well covered by earnings per share, with EPS regularly coming in around twice the dividend. That means that even if earnings growth should falter one year, the company can keep up its cash handouts without a problem.
And that’s exactly the situation we’re facing now. The current consensus of analysts’ forecasts suggests a 4% fall in EPS this year, to 101p — and as we’re so close to that June year-end, it’s probably going to be close to the mark.
Dividend well covered
But that should be no impediment to a decent dividend rise, and the City is forecasting an 8% hike to 51p per share. Even with that slight dip in earnings, the payment would still be covered a fraction under two times by expected earnings.
The consensus of forecasts has slipped back a little over the past 12 months — from EPS of 115p with a 52p dividend, to today’s suggestion of 101p and 51p respectively. We also have a couple of the most recent individual forecasts coming in below the consensus and suggesting EPS of just 99p. But it’s only a small decline over the year, and it’s well within the more bearish general stance on the FTSE these days.
Should we buy or sell Diageo shares? Well, we currently have 16 out of 30 analysts who reckon we should buy the shares — and 14 of those rate Diageo a Strong Buy. Of the rest, 12 are sticking with a neutral Hold stance with one each in the Sell and Strong Sell categories. Overall, that’s an unusually bullish consensus.
Diageo looks good
I often find myself at odds with brokers’ recommendations, as they’re frequently too optimistic and they often tend to just go with the crowd. But with Diageo, I think they’re right — and I foretell handsome rewards for those who invest with a 20-year horizon.