Why I would sell Lloyds Banking Group plc to buy Diageo plc

Successful investing is all about accurately predicting the future. Unfortunately, predicting what will happen even a few hours in the future is almost impossible and trying to predict what will happen in three or four years’ time with any degree of accuracy is completely impossible.

That being said, by looking at past trends, we can get some idea of where certain companies should be five years from now. 

Take alcoholic beverage behemoth Diageo (LSE: DGE). Over the past few decades, through mergers and acquisitions, Diageo has grown into the world’s largest spirits producer. Over this time the group has shown that it has the defensive qualities needed to weather all types of market environment. Indeed, between year-end 2007 and year-end 2010, while the rest of the world was struggling with the fallout from the financial crisis, Diageo’s revenue grew by 31%. 

What’s more, the company owns a collection of the world’s largest spirits brands, which have stood the test of time. Smirnoff Red Label Vodka is 152 years old, and the Johnnie Walker brand is over 200 years old.

Beware disruption 

In a world where technology is rapidly disrupting most industries, Diageo stands out as one company unlikely to see its business model broken down by competitors anytime soon. Just as it’s highly improbable that another company will be able to come along with a product that wins consumers around the world over in the way Guinness, Johnnie Walker, Smirnoff Vodka, Captain Morgan and Baileys have done for more than two centuries.

Diageo’s steady growth and rich product heritage are the two key reasons why I believe the company is a much better investment than the UK’s largest mortgage lender Lloyds (LSE: LLOY).

Battling for growth 

Lloyds’ business model is facing an assault on several different fronts. 

Firstly, the company is having to grapple with increasingly stringent demands from regulators. Secondly, it’s having to fight challenger banks for business, which is a fight made more complicated by the fact that the public still distrusts large banks. Thirdly, low and falling interest rates are putting pressure on Lloyds’ ability to generate an attractive return for investors.

And lastly? Lloyds’ success is dependent on the UK’s economic environment. A recession or slowdown in economic activity will put the brakes on the bank’s growth. As mere mortals, the average Foolish investor can’t see what the future holds for Lloyds and the UK economy with so many unknowns to consider. Diageo’s outlook, on the other hand, is much clearer.

City analysts expect Diageo to report earnings per share growth of 15% for the year ending 30 June 2017. Based on this estimate the shares are currently trading at a forward P/E of 21.2 and support a dividend yield of 2.9%. City analysts are expecting Lloyds’ earnings per share to fall by 14% this year and a further 14% for the year ending 31 December 2017. The shares currently trade at a forward P/E of 7.5 rising to 8.6 next year as earnings fall further. 

Overall, if you’re looking for growth and predictability, I think Diageo is the better investment.