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Author: IDPickering Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 50882  
Subject: Diageo (DGE)? Date: 22/07/2012 19:03
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Good evening all,

Further to my thread on Friday regarding my adding Reckitt Benctiser (RB.) to my HYP here;

http://boards.fool.co.uk/my-hypisa-update-12602615.aspx

I'm interested in lootman's comment, "I wouldn't mind seeing Diageo in there, it's low yield notwithstanding, but otherwise I think you have the staples covered decently. don't lose sleep over it; you have balance."

I note also Stephen Bland's view on lower yielders,

How Low Should You Go

I would call an HYP an HYP where the total portfolio yield is above the market at purchase. To achieve this, it doesn't follow that every single share in it must individually yield more than the market and this is the paradox. In my view an HYP an have shares in it that are average or low yielders and still be an HYP.

http://www.fool.co.uk/news/investing/high-yield/2006/12/13/h...

In the interests of diversification, I think it might be an idea to add them to the pot.
I think I can stomach the current lower yield on offer.

So, if this Foolish, or just plain foolish?

What do you guys think?

Ian.
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Author: tigah Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29696 of 50882
Subject: Re: Diageo (DGE)? Date: 22/07/2012 20:44
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Hi Ian,

I think you should list the HYP candidates that match your criteria sort by yield and then work your way down the list until you hit a candidate or sector that is under weight or not represented.

If it's diageo problem solved.

If it's something else that is acceptable / suitable then you have a better income stream.

I don't think PYAD's intention was to encourage purchasing shares with a below market yield as standard but to say when there aren't other suitable alternatives then to add a sector not otherwise represented...

HTH Tigah.

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Author: Arborbridge Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29697 of 50882
Subject: Re: Diageo (DGE)? Date: 22/07/2012 20:52
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Ian,

Do you need to add a sector which doesn't offer a large share giving suitable yield? This is a general question applying to all sectors. Let's not go collecting for the sake of it - your HYP is very well diversified.

I have DGE, it's a great company for a HYP, but you may have to wait until there is some accident which brings the price down. Conversely, of course, my finger is poised on the "trim" button since the yield has dropped so much and the price risen.

If it gets away from you, so what? There are other fish in the sea.

How about more BLT or even RB?


Arb.

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Author: Arborbridge Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29698 of 50882
Subject: Re: Diageo (DGE)? Date: 22/07/2012 20:55
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I don't think PYAD's intention was to encourage purchasing shares with a below market yield as standard but to say when there aren't other suitable alternatives then to add a sector not otherwise represented...

I agree with that, but would you collect sectors for the sake of it? e.g. Forestry, Chemicals - if no suitable companies exist. Ian has enough sectors to spread the risk and should look at the problem from a company specific point of view and choose the best at the time.

Arb.

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Author: IDPickering Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29699 of 50882
Subject: Re: Diageo (DGE)? Date: 22/07/2012 21:30
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Guys,

Thank you very much for taking the time to post your views on this.
I don't want to 'stamp collect', so shall not be adding Diageo to
my HYP(ISA).

Centrica and Tesco are next in line.

Regards,

Ian.

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Author: valuemargin Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29700 of 50882
Subject: Re: Diageo (DGE)? Date: 22/07/2012 22:08
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Hi Ian,

How low should you go with Diageo?

Diageo (DGE), should be regarded as a core aspiration holding for any Foolish HYPer with a collection of spirits, wine and beer brands to die for -some of DGE'S consumers probably do, if they abuse them!

It is a great defensive business for all seasons and one of the top 6 holdings in my own HYP. However, at an all time high of 1696p, with a running yield of just 2.4% and a prospective PER of at least 17, it is too richly priced at present to deliver the value HYPers seek. Whilst DGE is as bomb proof as they come it is, nevertheless, a giant and slow growth business. Over the past 20 years the dividend has grown as steadily as the operation of the Trumpton clock at 6%pa. To see what I mean the rate has been 6.5%pa over the past decade and 5%pa over the past five challenging years. The recent interim was at a stellar 7%pa. If the 6% rate continued over the next decade, you would still only be enjoying a 4.3% yield at today's cost in 10 years time with many sub par yield payouts in between.

Obtaining a high starting yield on DGE is unlikely, yet there are times when a reasonably competitive yield is on offer. Looking back at my own records, I have bought DGE in six tranches: four times in 2004 on historic yields of 3.8%, 3.7%, 4.0% and 4.0% respectively; in 2006 on a 3.5% yield and finally again in 2010 on a yield of 3.4%. The current yield on my blended purchase cost of my 2004 transactions is now 5.9% after 8 years, which I think is competitive, whilst at current prices and dividend growth rate projection you would only be getting around 3.9% after 8 years, which I think is not.

The current popularity of DGE with Mr. Market will inevitably wane at some point, and you may be able to get a 3.5% starting yield or at minimum a prospective 3.5%, which I think is a fair entry point, given the relatively low risk nature of the business.

HTH

Valuemargin

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Author: breelander Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29701 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 01:22
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Looking back at my own records, I have bought DGE in six tranches: four times in 2004 on historic yields of 3.8%, 3.7%, 4.0% and 4.0% respectively; in 2006 on a 3.5% yield and finally again in 2010 on a yield of 3.4%.

I can add that my records show I bought in March 2011 at a historic yield of 3.3%. Turns out that if I'd waited until mid-August (remember the fire-sale?) 3.5% was on offer for a brief while.

And that word 'brief' is the key reason you may find it difficult to add Diageo to your flock. The market tends to mark down the likes of DGE for only a few days before bargain hunters drive the price back up again. It's not something that's likely to coincide with your regular monthly purchases, or that's easy to plan for in advance.

You may like to consider holding some funds to one side to take advantage of such momentary bargains as may be on offer. Who knows what this August may bring. ;-)

Bree.

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Author: IDPickering Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29702 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 02:18
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breelander & Valuemargin,

Thanks for your posts guys.

Certainly one to watch out for as a likely purchase should
it become opportune to do so in the future.

Regards,

Ian.

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Author: gadgetmind Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29703 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 09:27
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Turns out that if I'd waited until mid-August (remember the fire-sale?) 3.5% was on offer for a brief while.

I made eleven purchases for my HYP in August 2011 including DGE on the 24th for just under £10.95. I did another three trades in Sept 2011 but since then have only traded three times in ten months.

I miss the sales. :-(

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Author: F958B Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29708 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 10:13
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I agree with valuemargin.

DGE are too expensive.
Reassuringly expensive? No.
I think that many "investors" are only interested in the company because the share price has done well, which gives investors a feeling of safety and reassurance that it must be good. Investors like to buy high-priced shares as they feel "safe", whereas investors dislike buying low-priced shares (even in solid companies) as nobody likes to buy what's unpopular.

Sectors come into fashion and go out of fashion - and brewers (and water) will probably be no exception. Although, for example, the water sector currently trades on high-teens P/E and 4% yield, it spent most of the last two decades trading at half that P/E and twice that yield. When the world economy finally settles down (which it will, one day) water companies are likely to see their shares de-rated by half - and a slow-growing 4% yield will take over a decade to repair the damage to capital (similar to GSK and VOD from 2000 to the present).
On the other hand, in the last couple of decades, supermarkets - including then-struggling Sainsbury - traded on high-teens P/E but have recently been de-rated to single-digit P/E's.
Market fashions come and go - and I suspect that there will be plenty of opportunities in the future to pick up DGE with a better yield (and better share price appreciation potential). In any case; one company doesn't make a portfolio. A portfolio will cope just fine without DGE for the time being.
Even without a change in market fashion, It's almost certain that the European mess and the US deficit will come back to haunt markets over the next couple of years, which will send shares into a tailspin once more and provide excellent long-term opportunities for those who've waited patiently for a buying opportunity.

Like valuemargin, I recently ran 2,3,5 and 10-year dividend yield projections - using sensible growth estimates - for the companies which I follow most closely (which includes DGE) and my studies suggested that even with constant 8% growth each year from DGE, they would still be in the lowest-yielding quintile.

Three sectors stood out as being likely to be in the lowest-yielding quintile in ten years time (at current purchase price), in addition to having a mediocre yield at present:
Alcohol/beverages
Water
Personal/household products

Some sectors which stood out as being likely to be in the higher-yielding quintile in ten years time (at current purchase price), in addition to paying a good yield now:
Electricity utilities
Food retail

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Author: tjh290633 Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29709 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 10:23
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Looking back at my own records, I have bought DGE in six tranches: four times in 2004 on historic yields of 3.8%, 3.7%, 4.0% and 4.0% respectively; in 2006 on a 3.5% yield and finally again in 2010 on a yield of 3.4%.

I can add that my records show I bought in March 2011 at a historic yield of 3.3%. Turns out that if I'd waited until mid-August (remember the fire-sale?) 3.5% was on offer for a brief while.

I only bought DGE in one transaction, on 06 May 2009, at 842p with a forward yield of 4.37%.

Every now and then such an opportunity arises, but no longer with DGE, it would appear, since the price has doubled since then.

Ian, keep a watchlist of shares that would be nice to own, and keep a watch on your watchlist for bargains that turn up.

TJH

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Author: IDPickering Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29710 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 10:42
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MOrning chaps,

Can I just say thanks to all who took the time to add their thoughts on this dilemna.

I can wait until shares such as DGE come back into bargain territory again, if ever, there's no rush.

Terry,

Ian, keep a watchlist of shares that would be nice to own, and keep a watch on your watchlist for bargains that turn up.

I certainly shall.

All the best,

Ian.

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Author: F958B Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29711 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 10:49
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I also completed a study recently which concluded that:

1.
Over a 10-15 year period, total shareholder return (dividends + capital growth) is not significantly correlated with the growth in company earnings; less than half of TSR can be explained by increase in company profitability.

2.
The single metric which had the best correlation with TSR was the P/E ratio at the start of the 10-15 year period.

.

In other words: highly-rated shares often are too popular, with a price tag so high that despite excellent growth, the usually-low starting dividend yield and subsequent mean-reverted share price performance tends to leave investors rather poor in terms of both income, income growth and capital growth.

The very best performers - in terms of income and capital growth - tended to be in the second-cheapest P/E quintile at the start.

.

Looking at expected earnings for the FTSE100, the second-lowest P/E quintile contains the following high-yield (but not worryingly high yield!) companies:

HSBC
BT
L&G
Tesco
IMI
M&S
Morrison
Reed Elsevier
Sainsbury
G4S
Vodafone


.

The above list also combines nicely with my forward dividend yield estimations in my earlier post, which suggested that food retail should be not only a high-ish-yield now, but compared to other companies which might also be bought at today's prices, supermarkets should also be above-average-yielding in ten years time - therefore providing one of the best high-and-rising dividend streams of the investment options available.

But not many people want to buy such an unloved sector nowadays because they're letting the share price action (and the "shock" of a big one-day drop in Tesco) override the low valuations, good yields and reasonably good operational performance of the companies.

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Author: Larky100 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29712 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 11:06
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HI Ian,

DGE is an odd one for me... in that I've only ever bought it on two occasions (29 July 2009 @ £9.15 and 21 April 2011 @ £12.03).

The 2009 purchase is now yielding 4.85% on this year's forecast dividend and my overall yield on cost is 4.19% for this year again based on the forecast payout.

However, the oddity is that although I'm sitting on a nice yield (and strong capital gain - but we never look at those do we? :-) ) it's certainly not a stock I'd either add to now or purchase for the first time.

It's in a dominant position, but the yield is just too low to accept average 6% growth a year - there are plenty of other opportunities out there that are better places for available cash right now.

If Mr Market does decide to separate temporarily from DGE I'd buy more but certainly not at the moment - even though personally I'd love to increase it's weighting in my portfolio.

Best of luck whatever you decide.

Regards,

Stuart

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Author: lootman Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29713 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 11:27
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the yield is just too low to accept average 6% growth a year

The appeal of that 6% compound growth is that it is near-resistant to economic and market volatility because, well, people will always drink in both good times and bad. So you sit back and let it do it's job of doubling it's earnings, dividends and (hopefully) capital growth every twelve years or so.

It's also fairly unique in that it's a world-beating company with a whole bunch of globally-recognised consumer brand names - there are remarkably few UK companies that can make that claim (Unilver, BAT and Pearson?). And there's nothing else in the alco sector if you discount pure brewers.

That's why I like to see it in any UK or global portfolio. Which isn't to say this is the best time to buy it, and I bought it considerably cheaper as well. But I'm also not going to sell it just because it's yield is below average. I just leave it there to do it's defensive, accretive job. And if I didn't own it, it would be on my watchlist for any pullback.

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Author: Luniversal Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29716 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 13:01
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The most frequently cited alternative to Diageo within alcohol is Greene King. I bought it for the Midcaps HYP, already having DGE in the 'proper' one. For those into contrasted pairings within one portfolio, as I used to be, GNK is appealing. British beer v. international hard stuff.

It is well up the FTSE 250 with a market cap of £1.3bn. It yields 4.3% to Diageo's 2.4%, so a half-and-half gets you into the sector on an average starting yield not far short of the market.

GNK had a tiny wobble on payouts over its Apr. 2009 rights issue, but I would not call it a Rotten Cutter. Its cagr for full-year dividend growth since 2000 has been 8.5% to Diageo's 6.1%, with even less volatility overall. Finances always need watching because it likes mopping up failed pubs (hence the rights call, and the Lord knows there are enough on sale) but it has never faced an angry bankers' ultimatum yet. Then there's the money-off-merchandise perk.

Recent talk here:

http://boards.fool.co.uk/greene-king-gnk-trading-update-1253...

Alternatives in booze:

http://boards.fool.co.uk/good-morning-johnny-by-other-claima...

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Author: jackofbasel Three stars, 500 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29718 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 14:19
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The most frequently cited alternative to Diageo within alcohol is Greene King.

Luni, the problem with that alternative is their very different business models. GNK only earns around 16% of its revenues from the wholesaling of its brews with the rest of its revenue generated by retail through its licensed estate. In order to do so GNK's economics are completely different due to the massive investment required in its licensed land and buildings which comprise £1.8bn or 60% of its assets. As a result it becomes part brewer and part property company which provides a real drag on the return generated on its capital base.

Last year DGE calculated its ROCE at a very healthy 15.9% (*). GNK do not disclose this figure despite the fact that the executive bonus schemes factor it in. That in itself is disappointing: a KPI upon which management are incentivised yet they don't care to let their shareholders know how they calculate it? But based on my calculations the figure is around a sub-par 7%. Such low ROCE businesses require more debt to expand which can clearly be seen in the massive gearing of GNK.

So whilst the two share the common aim of delivering booze to the masses, the totally different route in which that is achieved makes GNK a very poor relation to DGE.

Jack

(*) and that is the prudent version after tax with exceptional items added back into capital.

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Author: Arborbridge Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29719 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 15:34
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Company REFS gives Greene King ROCE as 11.7% for 2011 (my edition of REFS is pre the current year end), and it has been around that figure for 5 years. It's true GNK and DGE are different companies. Only 10% of GNK profit comes from the original brewing company, 16% from their Bellhaven acquisition (which I assume is mainly bewing) the rest is predominantly retail sales - pubs and food.

It's complementary rather than a substitute. The free cash flow has always been good, although it deteriorated last year to 1.35x. See my post #29072.

Arb.

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Author: Luniversal Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29720 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 15:52
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the totally different route in which that is achieved makes GNK a very poor relation to DGE.

No. It makes it a very different relation: that is the idea of contrast within a broad sector.

You're letting your professional deformation as a finance director show again, jack. As a HYP-er I don't let the 'ROCE' and the theoretical dangers of borrowing scare me off. I don't even care all that much if the directors are on the take. I only want rising divis for the next 20-30 years. Show me why Greene King would become a cutter or go bust in the meantime and I will worry.

Handsome is as handsome does. Debt is not expensive now, and Greene King has squared having a lot of it with paying handsome dividends for a long time-- faster than Diageo, for all its superior ROCE. It may be part-property company, but it has handled that side of its trade a sight better than most of our big specialist REITs.

There is nothing new about a brewer having a tied estate and not being able to finance it from cash flow. Brewers were one of the first big sectors to float lots of loan stocks a century or more ago.

You can always find a reason grounded in accountancy not to buy anything. We accountants had it beaten into us to say no and save our own backsides, because our first role was as auditors. That conditioning not only makes accountants virtually useless as whistleblowers. It ill befits a bean-counter who tries to set up an enterprise; very few drama critics have written great plays, and very few great entrepreneurs were CAs.

As investors we too are, in a small way, risk-takers leaping in the dark. Sooner or later a HYP-er has to stop being Chicken Little and get on with it.

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Author: jackofbasel Three stars, 500 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29721 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 15:58
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Company REFS gives Greene King ROCE as 11.7% for 2011 (my edition of REFS is pre the current year end), and it has been around that figure for 5 years.

Arb, that'll be the pre-tax ROCE. That's fine for comparison between companies, but in absolute terms the post tax figure is more meaningful. They'll also calculate capital employed differently but adjusted for tax they would still be less than 9% which is very unattractive. Management's challenge now is to ensure that future investment is more profitable to try to drag that number up to something more acceptable.

Gearing was 68% in 2004 and 158% in 2012 despite an intervening rights issue. That is reflective of the incremental capital required to sustain a moderate growth rate, but it has placed more risk on shareholders in doing so. GNK is probably the best of a bad bunch as far as pubs are concerned.

Jack

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Author: jackofbasel Three stars, 500 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29722 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 16:14
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I don't let the 'ROCE' and the theoretical dangers of borrowing scare me off

Theoretical danger of borrowing??!! I think there's a few HYPers out there that might have seen the practical danger.............

And it's a real mistake to refer to my "deformation" as an FD, Luni. I'm on here talking as a shareholder like everyone else. If I give my opinion on here I don't expect everyone to agree, but there's no need to get personal. My post actually has little to do with accountancy - ROCE isn't even a GAAP measure - it is to do with assessing the characteristics of a business which is likely to deliver value for shareholders over a long period. Dividend histories are important, but not the whole story.

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Author: Arborbridge Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29723 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 17:13
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Gearing was 68% in 2004 and 158% in 2012 despite an intervening rights issue.

There was a step change in their borrowings which probably marked the acquisitive phase they embarked upon. I don't remember which year the rights issue was, but it was also earmarked for "this brewing company is a snip: we must buy it". There was never the feeling they were coming cap in hand due to running out of operational cash: there was a purpose to it. Net liabilities are £1493m, horrendous, but less than the peak of £1606m in 2008.

It's not pretty but if you believe their takeover spree will eventually payback, I'm afraid, it's part of the story you have to put up with. Diageo also tends to be more highly geared than the ideal HYP company:

2011 2010 2009 2008 2007
126% 182% 241% 187% 120%

Last year they had a liabilities of £6610m.

Diageo is most certainly the stronger: international presence, higher interest cover, higher cash flow. But that's not to say that GNK isn't a relatively safe holding for a second-liner. Personally, I want to see its spending spree end and the cash flow cover stable or go up next year, otherwise I might start to worry.
Any HYPers thinking of Greene King should note that the share price in the past month or so has increased nigh-on 25%. The market seems to like them for the moment, as with DGE.

Arb.

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Author: Luniversal Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29725 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 18:14
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Theoretical danger of borrowing??!! I think there's a few HYPers out there that might have seen the practical danger.............

When, in the specific case of Greene King?

assessing the characteristics of a business which is likely to deliver value for shareholders over a long period.

Strategic Ignorance declares that is futile. ROCE-- which like most technical metrics has been reduced to inanity by the tergiversations and cowardly concessions of the accounting profession to their clients-- has little or no predictive power in the matter of dividend payouts on the horizon it is proper for a HYP-er to adopt. Nor is delivering 'value' the name of the game. This is not a total return or capital gain business, it's about income and nothing but.

You are always worrying about the health of companies as though they were ends in themselves, entitled to immortality. As a HYP-er I want to loot them till I die, no more. They are more than welcome to die the day after me.

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Author: IDPickering Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29728 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 18:40
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G4S

Isn't that taking 'strategic ignorance' a mite to far? :-)

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Author: Arborbridge Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29729 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 18:45
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They are more than welcome to die the day after me.

Luni, I think Jack is worried they might die before you:)


Arb.

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Author: F958B Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29731 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 19:25
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Hi Ian

You said:
"....G4S....Isn't that taking 'strategic ignorance' a mite to far?...."

I'm not sure whether it was directed at me, or whether it was for someone else who had mentioned it in another post which I hadn't noticed.
So I'll assume it was meant to me. :-)

I am both high-yield and contrarian. G4S might well be suitable for both contrarians and rising-income-seekers in the longer term.
G4S appear to be basically a decent business with some "recession resistance" and with reasonably good past operational performance and reasonably good multi-national growth prospects, but which have hit a rough patch - as many companies do.

The shares trade on a likely forward P/E of 9-10 <fairly cheap>, excluding the £40m-ish loss due to the olympics which will probably shoot the P/E up into the high-teens when results are reported at the end of the year.

At current prices, G4S look like they'll be an above-average dividend payer over the next decade (a combination of average yield now, growing at above-average rate and very well-covered, so room to reduce cover and raise the payout as the business matures - same as Morrison).

But I'm not rushing to buy as I'm not a knife-catcher. If the shares stabilise and settle into a new trading range around or a bit below corrent prices (probably in the 220-240 range), and if things don't get significantly worse at the operational level (a few cancelled contracts is expected), then I may well be taking a large portion of shares later in the year.

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Author: nimoy One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29736 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 21:31
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Strategic Ignorance declares that is futile.

I've always assumed (happy to be corrected) that strategic ignorance applies to not trying to guess the future of a given company or how market changes might affect it... Basically ignoring the "unknown unknowns" as well as the "known unknowns".

However ignoring current present metrics (known knowns) such as ROCE, debt, there's nothing strategic about it, that's just plain ignorance, isn't it? I'm happy to admit that I am a bit ignorant in some of such metrics, and I'm always grateful of other people's opinions on the matter. Dismissing it with such a cavalier attitude and lemming-like conviction is not doing anybody any favours!

In other words, is there any study that shows that higher ROCE and lower gearing is not a good indication of future sustainability of the business, it's profits and it's dividends? Intuitively I'd be happy to admit that it is a sensible assumption, but if you or anybody knows any better I'd be happy to see why it should be ignored.

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Author: F958B Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29738 of 50882
Subject: Re: Diageo (DGE)? Date: 23/07/2012 22:22
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nimoy
".....is there any study that shows that higher ROCE and lower gearing is not a good indication of future sustainability of the business....."

Lower gearing means the company is likely to cope better with a downturn in business; it doesn't have to divert a portion of the profits towards covering the interest charge.

Higher ROCE seems to be worshipped, but the other side of the coin is that the company may have few (or even negative) assets.

A company with low ROCE may have lots of assets and become a takeover target.

If we put Next and Sainsbury side-by-side, Next have a high ROCE (and negligible net assets) while SBRY have a low ROCE (and lots of net assets just begging for an asset stripper to make a bid for them).

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Author: Luniversal Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29749 of 50882
Subject: Re: Diageo (DGE)? Date: 24/07/2012 10:23
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However ignoring current present metrics (known knowns) such as ROCE, debt, there's nothing strategic about it, that's just plain ignorance, isn't it?

I pooh-poohed ROCE, not debt. I am all in favour of the free cash flow calculations and guesstimates such as Arborbridge does for us. These are of vital and immediate relevance to the next year or two's payout: what Strategic Ignorance holds to be the limit of "all ye know on earth, and all ye need to know".

ROCE, however, was advocated because it is "to do with assessing the characteristics of a business which is likely to deliver value for shareholders over a long period." That is nothing to a HYP-er. We are not value or recovery investors or start-up backers. We want income.

ROCE is useless for our purposes first and foremost because it is a cost or management accounting metric: an internal yardstick which has leached into investment analysis. It would be useless even if it had not been corrupted. It is often prayed in aid by directors with small shareholdings and big pay packets to justify being stingy to their owners and employers. Cross-company comparisons between beasts as different as Greene King and Diageo are wonky, and the accounting profession has mucked about with definitions of the underlying factors that determine ROCE so much over the years that historical trends within individual companies are dubious too.

Cash balances and dividend cheques are, to cut the story short, a lot harder to fake. If ROCE was as pure as the driven snow it would have little to teach us about high yields and short horizons.

Let's get down to what Degsy would call granularities-- Greene King.

Are most pub chains hopeless cases? Indubitably.

Are they loaded with dangerous debt? You bet.

Is Greene King too ? Yes, by the standards of most HYP shares its capital gearing is nastily high.

But the debts aren't being called in within the SI horizon-- can it service that debt meantime? Yes, the interest burden is not onerous or increasing and the ratio of free cash flow to dividend expense, as worked out by Arb., is not deteriorating.

Did GNK have a rights issue to bail itself out? No, to be a vulture on other pub groups which were struggling.

Has that extra capital been well serviced? Yes, divis are still rising.

Has Greene King at any time since the Nineties been in serious trouble as a consequence of ambitious expansion? No.

Why do you think it is such a bad move? Er, because my textbook taught me to think its ROCE is too low compared with something or other.

Slicking every business up the same way with unidimensional benchmarks of "performance" is no more valuable in appraising shares and yields for a HYP than in choosing a collective fund. And I'd beware of judging a share on "the future sustainability of the business" in any case. Companies are their owners-- not the workforce, the board, the customers or any other parasitical "stakeholding" blighters. Among the sorts of company that go into HYP, the return on capital employed to 2014 will not tell you very much about their propensity to shell out tbeir earnings. What about beyond 2014? That is not SI.

As I said, if Royal Dutch Shell pays me a rising dividend for the next 20-30 years, it can die "unsustainably" in a ditch a day later-- or even before I do, if I have feasted to repletion off it.

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Author: Degsy67 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29757 of 50882
Subject: Re: Diageo (DGE)? Date: 24/07/2012 14:08
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I pooh-poohed ROCE, not debt. I am all in favour of the free cash flow calculations and guesstimates such as Arborbridge does for us. These are of vital and immediate relevance to the next year or two's payout: what Strategic Ignorance holds to be the limit of "all ye know on earth, and all ye need to know"....

... What about beyond 2014? That is not SI.


Luni

I'm concerned that you invoke Strategic Ignorance as an incantation when anyone suggests alternate ways to assess a HYP candidate. I don't think there's any harm done in exploring additional criteria such as ROCE, low beta, P/E etc which may help to differentiate potential HYP candidates for more experienced investors. Strategic Ignorance was used by Pyad as his 'get out of jail free card'. It allowed him to keep his TMF articles to just the right length to get paid and also, like any good novel, it allowed enough to remain unsaid to provoke endless discussions. With a single bound he was free!

To be fair to Pyad it also enabled him to focus everyone on some very simple concepts and to try to set aside a lot of noise. It was the simplicity which originally attracted me to HYP. Now that I'm a more experienced investor however, I recognise SI for what it was.

If I'm investing in a company for the long term then I want to know how effective they are at using the share of my profits which they retain in the business. I want to know if they're squandering it or using it to good effect to strengthen my income stream. If I have two holdings in my portfolio on similar yields and I'm trying to decide which one to top up then something like ROCE may be a useful way of helping me to decide.

Degsy

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Author: Arborbridge Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29765 of 50882
Subject: Re: Diageo (DGE)? Date: 24/07/2012 20:04
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If I have two holdings in my portfolio on similar yields and I'm trying to decide which one to top up then something like ROCE may be a useful way of helping me to decide.

See "The Little Book that Beats the Market", Joel Greenblatt. He uses something like high ROCE plus low PE to pick shares for growth, not yield. It works pretty well. You could look for this as your safety factor after having selected for yield, but it is unnecessary "complexification" in my opinion, but if someone wants to do it, I see no harm. It would certainly be interesting to see what choices it through up.


Arb.

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