Is Diageo plc A Better Bet Than SABMiller plc?

In news today, Diageo (LSE: DGE) announced the restructuring of its South African and Namibian operations.

The firm was partnered with Heineken N.V. and Ohlthaver & List. A sale of assets will now see Diageo raise around £128 million and free the firm to concentrate on the next stage of growth in the region for spirits, ready-to-drink blends (RTDs), beer and cider, with a simplified ownership structure.

In full control

The move is important to Diageo because it puts the firm in charge of the driving, on its own. Diageo’s presence in the area means the firm operates in SABMiller‘s (LSE: SAB) natural heartland, which makes a comparison of the two alcoholic beverage providers interesting.

Diageo will operate in South Africa and Namibia through wholly owned subsidiaries. To pull off the transaction the firm plans to sell various brewing and drinks assets to Heineken, and acquire the remaining shares which it does not already own in brandhouse Beverages (Proprietary) Limited, the beer and spirits sales and marketing joint venture in South Africa, which will give Diageo full control.

Heineken plans to emerge from the deal as the #1 beer-focused outfit in the region, which could put still further pressure on SABMiller’s South African business. 

Clash of the defensive titans

The pursuit of supplying consumer goods with great repeat-purchase credentials has always been a nice little cash generator. The fact that Diageo and SABMiller produce alcoholic ‘sin’ products with the added ‘attraction’ of addiction thrown into the mix makes beverage suppliers seem even more ‘defensive’. That’s why we investors fall so hard for such firms — consistent cash flow often leads to a generous, steady and rising dividend payout.

Yet we can see from Diageo’s and Heineken’s manoeuvring that these firms are serious about growing market share in the South African and Namibian regions, possibly at the expense of SABMiller’s market share.

Drinks companies have loyal customers but they still operate in competitive markets. The outcome of competitive skirmishes in this one region won’t make or break any of these firms on its own as all three enjoy worldwide operations.  

What now?

At a share price of 1824p Diageo’s forward dividend yield runs at 3.1% for year to June 2016 and the forward price-to-earnings ratio (PER) sit at just over 19. City analysts following the firm expect earnings to grow 6% that year.

Meanwhile, SABMiller’s share price of 3342p throws up a forward dividend yield of 2.3% for year to March 2016. The forward PER of 22 compares with analysts’ predictions of an 8% uplift in earnings.