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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: of 53348  
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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