Sin stocks like Diageo (LSE: DGE) (NYSE: DEO.US) and SABMiller (LSE: SAB) have a long history of outperforming the market and delivering above-average shareholder returns.
In this article, Im going to compare Diageo and SABMiller, along with Irn Bru maker A.G. Barr (LSE: BAG), to see which looks the better buy in todays market.
1. Profit and dividend growth
How fast have earnings per share (eps) and dividend risen at each firm over the last five years?
Diageo |
SABMiller |
AG Barr |
|
5-year average eps growth |
7.7% |
6.5% |
5.9% |
5-year average dividend growth |
6.3% |
9.1% |
7.4% |
There are some slight differences, but the picture is clear: earnings growth has been significantly above inflation, and shareholders have enjoyed a dividend income thats risen in real terms.
2. How profitable?
All three of these companies trade at a premium valuation, and have done for many years. One of the main reasons for this is that they are very profitable, as these figures show:
2014/15 |
Diageo |
SABMiller |
AG Barr |
Operating margin |
22.8% |
20.5% |
16.1% |
Return on capital employed |
11.1% |
10.9% |
21.1% |
The differences here are interesting: while Diageo and SABMiller both boast superior operating margins, Barrs superior return on capital employed (ROCE) suggests it may ultimately be a better business for shareholders. ROCE measures the return on shareholder fund and debts generated by a business. A return in excess of 20% is impressive.
3. Whats next?
Weve seen how these three drinks firms have performed over the last five years, but what about the future?
Currency headwinds and slowing emerging market growth have impacted on Diageo and SABMillers performance, while Barrs UK focus has helped it maintain momentum as our economy has started to recover.
These trends look likely to continue over the next two years, based on the latest City forecasts:
Diageo |
SABMiller |
AG Barr |
|
2015/16 forecast eps growth |
-7.5% |
+6.3% |
+9.5% |
2016/17 forecast eps growth |
+9.1% |
+4.4% |
+7.4% |
I remain bullish on Barr: although the firm warned this week that price deflation in the UK could put pressure on revenue growth, I dont believe this will derail Barrs attractive long-term story.
Todays best buy
Barr has one other advantage over its two larger peers it has net cash, whereas both SABMiller and Diageo are burdened with high levels of debt. These firms high profit margins have meant that this hasnt been a problem historically, but it is an additional risk.
All three companies trade on a forecast P/E of about 20 and offer prospective yields of between 2% and 3% these arent cheap stocks.
However, I believe that all three should continue to deliver solid returns for investors, thanks to their strong brands and the sticky nature of their products people are loyal to their favoured drinks.
In today’s market, I’d be tempted to pick Barr as my top buy, with Diageo second — but ultimately it’s your decision.
However, you may be interested to learn that Diageo, not Barr, was recently chosen by the Motley Fool’s top analysts for their recent report, “5 Shares To Retire On“.
I believe that the five stocks in this report could deliver inflation-beating growth over many years, but I’d urge you to take a look and decide for yourself.
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Roland Head owns shares in Diageo. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.