Which Beverage Giant Is The Better Buy: SABMiller plc or Diageo plc?

SABMiller (LSE: SAB) and Diageo (LSE: DGE) (NYSE: DEO.US) are two extremely defensive companies, well positioned for long-term growth. 

On one hand, Diageo counts the world’s bestselling spirit as one of its leading products, while SAB’s portfolio boasts the world’s bestselling beer. 

But which company should you choose for your portfolio?

Premium branding 

Diageo owns some of the best known spirit and beer brands in the world and for this reason alone, the company can be considered a core holding for any portfolio. 

The company’s drinks cabinet contains the likes of Guinness, Smirnoff Vodka, Johnnie Walker whiskey and Baileys, brands that practically sell themselves. What’s more, due to the superior nature of these products, Diageo can command a lofty sales premium with an average gross margin of approximately 50% during the past five years.

Further, Diageo continues to expand into both new markets and product categories. The company has been building its presence within the premium tequila market, a fast-growing segment of the US drinks industry.

Additionally, Diageo has made an offer to acquire Indian based United Spirits, giving the company a solid base to drive growth within Asia — India is the world’s largest whiskey market. 

But even if Diageo fails to drive growth organically, the company should be able to benefit from the growth of the global spirit market, which is set to expand at an annual rate of 6% to 9% until the end of the decade.

Emerging markets

SAB lacks exposure to the premium beverage market like Diageo, however, the company does have more exposure to emerging markets. 

Demand for beer within emerging markets is expanding rapidly and this is where SAB is trying to drive growth.

Indeed, the company reported, within its full-year earnings release that while earnings in Europe declined by 10%, they rose by 8% and 4% respectively for its North American and Latin American businesses. SAB’s management noted that the US beer market grew during 2013 – the first time it’s done so since 2008.

What’s more, SAB jointly owns the lager brand Snow, China’s most popular beer and the company is set to benefit from numerous major sporting events throughout 2014, including the World Cup.

Still, the majority of City analysts expected the global beer market to grow at a slower rate than the spirit market for the next few years. 

Looking after investors

SAB and Diageo are both high-quality companies, with plenty of potential for growth but one thing that needs to be taken into account, is how well these companies look after their investors.  

Diageo’s management has put sustainable dividend growth at the top of its agenda. The company currently offers a dividend yield of 2.5% and has hiked the payout at least 6% per annum during the past ten years. The payout is covered twice by earnings.

Meanwhile, SAB’s dividend yield currently sits just below 2%, covered more than twice by earnings and has grown at a similar rate to that of Diageo’s payout during the past ten years.

However, Diageo trades at the more attractive valuation of 19 times forward earnings, compared to SAB’s 21 times.

Foolish summary

All in all, both Diageo and SAB have their attractive qualities but Diageo’s portfolio of luxury brands definitely makes the company the more attractive investment.