Booze sellers can be pretty good defensive investments during economic downturns — whatever people need to cut back on when the belts are tightening, they do seem to carry on wanting a snifter or two.
Big two
We only have to look at the big two on the FTSE 100 to see what I mean. Shares in Diageo (LSE: DGE) (NYSE: DEO.US) are up 85% over the past five years to 1,775p against a FTSE 100 that has struggled to put on 40%.
And SABMiller (LSE: SAB) (NASDAQOTH: SBMRY.US) shares have done even better, hitting a 130% rise to 3,313p!
But which is better to buy now? Here’s a quick look at the two companies’ financial statistics:
| Year | Diageo | SABMiller |
|---|---|---|
| EPS growth 2014 | -7% | +2% |
| P/E |
19.5 | 20.5 |
| Dividend Yield |
2.8% | 2.1% |
| Dividend Cover |
1.85x | 2.30x |
| EPS growth 2015* |
+5% | +5% |
| P/E |
17.5 | 21.6 |
| Dividend Yield |
3.2% | 2.1% |
| Dividend Cover |
1.81x | 2.22x |
| EPS growth 2016* | +7% | +10% |
| P/E |
16.6 | 19.6 |
| Dividend Yield |
3.4% | 2.3% |
| Dividend Cover |
1.80x | 2.22x |
* forecast
The stronger price run for SABMiller has clearly taken its toll on fundamental valuations, pushing the P/E to 20 and more — the long-term FTSE average stands at around 14.
Great brands
But if we look at the company’s markets and brands, it’s not hard to see why its shares command such a premium. Miller, Carling, and Pilsner Urquell are well known in the UK. But the UK only accounts for 2% of SABMiller’s annual turnover — and the USA just 1%!
SABMiller’s home base of South Africa was responsible for a full 20% of 2013 turnover, with Colombia coming a close second with 17% and Australia in third place with 12%. And the company sells hundreds or brands around the world.
And yet more
But then, Diageo is in a similar position, owning a good number of the world’s most popular wines and spirits brands, including Gordon’s Gin, Smirnoff Vodka, Hennessy, Moët & Chandon, Captain Morgan and, of course, that breakfast of champions, Johnnie Walker.
In terms of quality and desirability of products, its a very close run thing, and I really would not try to choose between the two.
So it comes down to fundamentals, and I’m still torn — I’m very strongly swayed by SABMiller’s share price having beaten the FTSE 100 for 12 years in a row from the year 2000.
The dividend tips it
But on balance, I just about prefer Diageo’s lower P/E valuations and superior dividend yields, albeit with slightly lower cover.