The UK economy is doing okay, but its not going gangbusters
The latest data shows that the economy expanded by 0.5% in the three months to the end of December, following growth of 0.7% in the third quarter, according to the Office for National Statistics.
Its the usual story: the services sector is holding up quite well but theres been a sharp fall in construction output. Industrial production also shrank by 0.1%, while the manufacturing sector was basically flat. Britains economic recovery remains patchy.
That may all be quite manageable except for the fact that real wages remain a sticking point for consumers. So the risks, as they say, to the economy are on the downside, in this Fools humble opinion.
Taking matters into your own hands
Top FTSE 100 companies know things could go pear-shaped at the drop of a hat, which is why many of them are starting to resort to somewhat under-handed tactics to stay afloat too many cliches??
Take Diageo (LSE: DGE) (NYSE: DEO.US), for example. According to The Telegraph, it has made the unusual move of extending payments to suppliers out to 90 days. The reason for the move is obvious healing a margin squeeze. Its an unfortunate move, though. Why? Because its margin squeeze aint that bad, and because its taking advantage of its market position.
Diageo insists that it needs to improve its cash flow and drive out costs. So just how injured is the brewers balance sheet? Not that much as it turns out.
Diageo has a debt to equity ratio of 1.35. Theres more evidence that its got its finances under control with an interest cover of 5.74. Its no surprise then to see that the company has a healthy profit margin of 12%.
So whats really going on? Well, as part of the information made available to the press, Diageo was reported as saying that it has significant investment projects under way across our operations in Scotland and Ireland and like any business, to support our investments we need to improve our cash flow and drive out costs.
In other words, Diageo is using its suppliers to help cushion the potential cash-flow headwinds that could come from its increased investments. Not cool!
Is this the catalyst to switch to SABMiller?
So I guess the question then is whetheryou should consider switching to SABMiller (LSE: SAB) (NASDAQOTH: SBMRY.US). Both Diageo and SABMiller have very similar fundamentals. To cover some of the basics, SABMiller has a price-to-earnings multiple of 25 times, and a dividend yield of 1.94%. Diageos price-to-earnings multiple is around 22 times, with a dividend yield of 2.63%. Its a tough call.
One way Diageo has chosen to grease the wheels is to make life a little more difficult for its suppliers. SABMiller,on the other hand, has chosen to reach out for synergies (joining up with Coca-Cola in Africa).
Based purely on the more sustainable approach, it seems to this Fool that the wiser investment decision is SABMiller, but it too has its challenges. In its latest accounts, SABMiller said net producer revenue rose 4% in the fourth quarter. Thats on par with last year. The company said, however, that volumes in China fell 9% during the quarter. Sales in North America also fell 1% as many Americans upgraded to more premium brews.
Both companies have their challenges, especially with regard to achieving growth, but I think its worth pointing out the different strategies these companies have employed to gain an advantage. Which stock do you think now has the most potential?
It’s hard to find companies like these that have reasonably strong balance sheets and earnings potential. That’s why it’s great that the Fools are on the job.
We’ve put together a report called 5 Shares To Retire On. Diageo is one such company that’s listed in the report. The rest of the companies are just sitting there waiting for you to discover them. It really is that easy.
Click here for you report. Don’t worry there’s no obligation to do anything further and it’s 100% FREE.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.