Head To Head: SABMiller vs Diageo

Published in Investing on 1 October 2012

Which drinks giant should you buy today?

In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are beer behemoth SABMiller (LSE: SAB) and spirits giant Diageo (LSE: DGE).

Alcohol consumption typically increases in gloomy economic times, and SABMiller and Diageo have outperformed the FTSE 100 over the last three, six and 12 months. Over six months the FTSE 100 is down 1%, but SABMiller's shares have risen 7% and Diageo's 14%.

Let's take our seats at ringside.

Round 1: earnings

 SABMillerDiageo
Recent share price2,720p1,740p
Last year price-to-earnings (P/E) ratio21.418.5
Current year forecast P/E18.016.9
Four-year earnings per share (eps) compound annual growth rate (CAGR) (%)1110
Current year forecast eps growth (%)189
Operating margin (%)2323

Sources: Digital Look, Morningstar, company reports. Winners in bold.

The first round is tight and the companies share the points. Diageo scores for its lower P/E, SABMiller for its higher earnings growth, and the pair are all square on operating margin.

Round 2: dividends

 SABMillerDiageo
Last year dividend yield (%)2.12.5
Current year forecast dividend yield (%)2.42.8
Four-year dividend CAGR (%)126
Current year forecast dividend growth (%)1010
Forecast dividend cover2.32.1

Sources: Digital Look, Morningstar, company reports. Winners in bold.

Round two is another hard-fought round with the companies again sharing the points. Diageo scores better on yield and matches SABMiller on forecast growth. SABMiller takes points for historic growth and forecast dividend cover.

Round 3: balance sheet

 SABMillerDiageo
Price-to-book (P/B) ratio2.76.4
Net gearing (%)74135

Sources: Digital Look, Morningstar, company reports. Winners in bold.

SABMiller finishes strongly, taking both points in the final round, and edges to an overall victory after the first two rounds were tied. The points tally is: SABMiller seven and Diageo five.

Post-match assessment

This was a close-fought contest. SABMiller's superior earnings and dividend growth, together with better numbers in the balance-sheet round, enabled it to emerge the winner.

It's worth noting, though, that Diageo's earnings and dividend growth are very decent indeed, despite being below the level of SABMiller's. Furthermore, Diageo took four of the five valuation-ratio points -- historic and forecast P/E, and historic and forecast dividend yield -- while SABMiller managed only one valuation point for its lower P/B.

SABMiller and Diageo are powerful companies with strong brands and good margins. They've been resilient performers during troubled economic times and the market rates them highly. Many investors are prepared to pay a premium price, as attested to by P/Es well above the market average and dividend yields well below.

These are the sort of companies it pays potential investors to be patient about. You're unlikely to get a good entry point after a sustained background period of economic uncertainty has led the market to drive up their share prices. You can bet that at some time in the future brewers and distillers will be unloved by the market and their ratings will get left behind, or that some temporary company-specific scare will produce a negative market overreaction, giving patient investors a good opportunity to invest.

Patience is one of the qualities that can build you a bigger investment return than you might think possible. If you are looking to profit as a serious long-term investor, I recommend you download the Motley Fool's free guide to help Britain invest better: “10 Steps To Making A Million In The Market”. The guide is available for a limited time only, but can be in your inbox immediately simply by clicking here.

Searching for dependable FTSE shares? This free Motley Fool report – “8 Shares Held By Britain's Super Investor” – reveals the major blue-chip companies favoured by the UK's leading dividend stock-picker, Neil Woodford.

Further investment opportunities:

> G A Chester does not own shares in any of the companies mentioned in this article.

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