Diageo (DGE)

[dealtn]

If all the money stays in the system, the assumed 8% rate of return on Shell will show up better than the 7.5% (2.5+5) rate of return on Diageo. Making alternative and asymmetric assumptions about what happens to cash will tilt the comparison in one direction or the other.

Yes, but to clear, DGE has a ROC of 17%, pays out a 2.5% dividend yield, which leaves 50% of earnings retained and reinvested at 17%. RDSB has ROC of 7%, pays out a dividend yield of 8% and retains no earnings. (If you prefer ROE then the comparison is 36% and 8%).

Plug those in a compounding function and you get a different story to the 8% and 7.5% as described. (Reinvest the 2.5% and 8% as well to keep it a closed system too, if that's preferable).

Now obviously you have no knowledge in advance of whether current ROC (or ROE) will be attainable for the retained earnings, this year, or any other. You also have different ways of measuring ROC, ROE, and indeed earnings. But in general I would look at a combination of Returns on Capital, combined with entry price consideration, say P/E, and measure success (or otherwise) by Total Return. I also look at cash, rather than earnings.

[Dod101]

Seeing where the share price of Diageo currently is, I am rather glad to have the Shell dividend to provide some comfort.

Dod

[Bouleversee]

Whenever I have looked at Diageo, although aware of its growth over the years, it has looked too expensive, with a low dividend yield (I haven't looked into whether there have been any specials) and a high P/E ratio so I haven't bought though I felt I must be missing out and very nearly decided to take the plunge not long ago. Just as well I didn't since they have now fallen quite a lot. So have my RDSB but at least I will get larger dividends from them. I don't need them for my personal expenditure at the moment but as the grim reaper approaches one must remember that if one wants to pass money on to the next generations, it is more tax friendly to give away regular gifts out of surplus income than to gift capital. The budget may change that, of course.

Much depends on one's personal perspective. My children and grandchildren also have cash doing nothing in their equity ISAs. With a longer term view and also not needing to draw income at present, which (if either) of these would be the best choice for their longer term? I am not inclined to buy anything till the market has shown signs of recovery on a stable basis (and may withdraw my own cash) but would like my family to be ready to pounce when the c-v situation seems to have calmed down and there has been time to assess the consequences. Some companies will suffer a real hit to profits but others will have largely been carried along with the tide. The secret will be identifying which is which and buying the latter when the tide has turned.

[77ss]

Seeing where the share price of Diageo currently is, I am rather glad to have the Shell dividend to provide some comfort.

Dod

Seeing where the share price of Shell currently is, I am rather glad to have the Diageo capital to provide some comfort!

Diversification is a great thing.

[dealtn]

Whenever I have looked at Diageo, although aware of its growth over the years, it has looked too expensive, with a low dividend yield (I haven't looked into whether there have been any specials) and a high P/E ratio so I haven't bought though I felt I must be missing out and very nearly decided to take the plunge not long ago.

It's been "expensive" and "low dividend yield" for years. Yet, look at a 10 year price graph (and if you're brave do the same for a cheap high yield stock, RDSB seems to have become the comparator of choice on this thread).

Unfortunately it's not so easy to look 10 years in the other direction. I use ROC as a guide, albeit a far from fallible one.

[monabri]

42 years for a new retiree is a long time...

[77ss]

42 years for a new retiree is a long time...

Indeed! However, on reflection, I was shocked to realise that I am nearly half-way there. I don't suppose that I will make the full 42, but 20 is easy-peasy. A long-term view is essential.

When it comes to DGE/RDSG, both have a place, but I have been gradually reducing my holdings in Shell (the market has helped with this of course!) and have no intention of doing so with Diageo.

[idpickering]

Trading update – Impact of COVID-19 outbreak April 2020

On 26 February 2020, we updated on the impact of COVID-19 in Greater China, certain other Asia Pacific markets and Travel Retail, mainly in the Asia Pacific region. We are now providing additional information due to the spread of COVID-19 to most of our other markets. Widespread containment actions put in place by governments across the globe in March, including the closure of bars and restaurants, are having a significant impact on the performance of our business.

https://www.diageo.com/en/news-and-medi ... pril-2020/

[idpickering]

Preliminary results, year ended 30 June 2020

Here; https://www.investegate.co.uk/diageo-pl ... 00039983U/

[Dod101]

Thanks Ian. So at least the Final has been held.

Dod

[dealtn]

Preliminary results, year ended 30 June 2020

Here; https://www.investegate.co.uk/diageo-pl ... 00039983U/

Mixed reception to this one. I can accept the non-cash write downs, but the profits and cash flows not as good as hoped. Like many shares it will be what happens going forward as we emerge from the economic slowdown that will be important, but it will take a couple of years before that drops out of the numbers (or next years comparatives).

Happy to trust to management and the (now lower) return on Capital.

No doubt I will look back at this when the capital return programme gets re-instated and they start buying their shares again at a higher level somewhat bemused that like most programmes they operate a buy high - stop low policy!

[KnightOfSpring]

Just finished listening to conference call (suprisngly it was far from clear that it was open to private investors but I got in!). These things are so difficult to gauge at the moment, but it seems that after some disappointing results they are more upbeat about the outllook. Regarding the dividend, they don't seem to have strict rules but take a "holistic view". If they are right in their optimism then there should be little threat to a dividend cut down the line. Regarding the US they think there could be a very short lived downturn and trading down, but that it will be more than compensated by the on trade opening up. They hadn't actually seen down trading in the lockdown (unlike a 2-3 Q down trading in the financial crisis). Spirits are taking share from beer and wine. Young people are drinking more spirits and cocktails have increased during lockdown. They had lost market share in Johnnie Walker, vodka and Captain Morgan in the US. Johnnie Walker I imagine was the biggest hit by some distance and could see why- they had a hugely suscessful White Walker /Game of Thrones edition that previously pushed sales up a lot. Also if cocktails are a big thing in lockdown would you really use JW in one? They were taking action to address this and felt confident it would bring results. JW has it's 200th anniversary coming up and imagine they have plans. I think they had been less prone to price discounting than competitors, which might have caused some short term market share loss, but may have protected the brands position long term. They have seen July stronger than June and expecting "sequential improvements" in Q1 and Q2 of 2020/21.

So overall I was a bit/somewhat disappointed with the results (albeit pleased they didn't cut the dividend) but quite pleased with the conference call. Don't think I will be doing any buying or selling in the near term unless there are sharp price movements from here. The market reaction of down 7% initially, narrowing to 5% fall after the call seems understandable in my view.

[ADrunkenMarcus]

I noted DGE isn't repurchasing shares at the moment, despite the price being cheaper. They'd been busy buying back shares in the low £30s rather than mid £20s as we have now. Companies are bad at doing share buybacks.

Held since 1998 but they do need to improve capital allocation IMHO.

Best wishes

Mark.

[ADrunkenMarcus]

Seeing where the share price of Diageo currently is, I am rather glad to have the Shell dividend to provide some comfort.

I wrote the following then noted the date of this post as being in February 2020. Ah, well:

Even at today's prices I think I'm up around 400 percent and Diageo has returned more than the book cost in dividends in addition. Shell and BP are really in the doldrums right now.

Best wishes

Mark.

[ADrunkenMarcus]

42 years for a new retiree is a long time...

It is for a new retiree, but it's less than an investing career might be - if we assume someone starts saving in their early 20s and lives to their early 80s then they have 60 years.

Best wishes

Mark.

[Bouleversee]

Seeing where the share price of Diageo currently is, I am rather glad to have the Shell dividend to provide some comfort.

I wrote the following then noted the date of this post as being in February 2020. Ah, well:

Even at today's prices I think I'm up around 400 percent and Diageo has returned more than the book cost in dividends in addition. Shell and BP are really in the doldrums right now.

Best wishes

Mark.

How long have you owned them?

[ADrunkenMarcus]

How long have you owned them?

Since October 1998. I inherited a small number as a child and have held them ever since. Moreover, compared to some of the other higher yielding companies they've done very well indeed. For example, if the Google chart is correct going back to May 2000, Royal Dutch Shell is down about 39 percent in share price terms while Diageo is up 381 percent. I appreciate Shell has paid a good dividend during that period but the capital has been massacred. I have done well with lower yielders which grind out moderate, dependable above-inflation dividend growth over longer periods.

Best wishes

Mark.

[Dod101]

I see that I wrote my quoted comment back in February. It has been an eventful six months!

My holding in Diageo is very recent and not a very happy experience. My timing turned out to be appalling. I first bought them almost exactly one year ago at £35! Dearly bought income as I keep saying about the tobaccos. I always thought that the yield was too low and it still is so I find it difficult to summon up any enthusiasm for them. I have since bought more as the price has fallen. maybe some day I will get my money back.

Seeing the latest post I should think that Unilever has done as well over the period he quotes and I have held them since before 2000.

Dod

[Bouleversee]

How long have you owned them?

Since October 1998. I inherited a small number as a child and have held them ever since. Moreover, compared to some of the other higher yielding companies they've done very well indeed. For example, if the Google chart is correct going back to May 2000, Royal Dutch Shell is down about 39 percent in share price terms while Diageo is up 381 percent. I appreciate Shell has paid a good dividend during that period but the capital has been massacred. I have done well with lower yielders which grind out moderate, dependable above-inflation dividend growth over longer periods.

Best wishes

Mark.

Lucky you! They have certainly done well and I, too, have done much better with modest yielders, where the dividend and s.p. increased from year to year. However, I am finding that some of those are nosediving in the current circumstances. Hope that doesn't happen to you.

[Breelander]

No doubt I will look back at this when the capital return programme gets re-instated and they start buying their shares again at a higher level somewhat bemused that like most programmes they operate a buy high - stop low policy!

I noted DGE isn't repurchasing shares at the moment, despite the price being cheaper. They'd been busy buying back shares in the low £30s rather than mid £20s as we have now. Companies are bad at doing share buybacks.

Buybacks (or rather, the reason for stopping them) were specifically addressed in the results....

On 9 April 2020 Diageo announced that it had not initiated the next phase of the three-year programme and that it would not do so during the remainder of fiscal 2020.

At 30 June 2020 the leverage ratio, calculated as adjusted net debt to adjusted EBITDA, was 3.3x and Diageo anticipates leverage to be above the target range of 2.5-3.0x through the year ending 30 June 2021. As such Diageo does not currently plan to reinitiate the programme until the leverage ratio is back within the target range.