Stock Analysis on Net
Stock Analysis on Net

Diageo PLC (NYSE:DEO)

This company has been moved to the archive! The financial data has not been updated since August 12, 2014.

Present Value of Free Cash Flow to Equity (FCFE)

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

Intrinsic Stock Value (Valuation Summary)

Diageo PLC, free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 11.77%
01 FCFE0 1,809
1 FCFE1 2,133 = 1,809 × (1 + 17.94%) 1,909
2 FCFE2 2,470 = 2,133 × (1 + 15.78%) 1,977
3 FCFE3 2,807 = 2,470 × (1 + 13.63%) 2,010
4 FCFE4 3,129 = 2,807 × (1 + 11.48%) 2,005
5 FCFE5 3,421 = 3,129 × (1 + 9.32%) 1,961
5 Terminal value (TV5) 152,670 = 3,421 × (1 + 9.32%) ÷ (11.77% – 9.32%) 87,513
Intrinsic value of Diageo PLC common stock 97,374
 
Intrinsic value of Diageo PLC common stock (per share) $141.42
Current share price $117.25

Based on: 20-F (reporting date: 2014-06-30).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.81%
Expected rate of return on market portfolio2 E(RM) 13.55%
Systematic risk of Diageo PLC common stock βDEO 0.80
 
Required rate of return on Diageo PLC common stock3 rDEO 11.77%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rDEO = RF + βDEO [E(RM) – RF]
= 4.81% + 0.80 [13.55% – 4.81%]
= 11.77%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Diageo PLC, PRAT model

Microsoft Excel
Average Jun 30, 2014 Jun 30, 2013 Jun 30, 2012 Jun 30, 2011 Jun 30, 2010 Jun 30, 2009
Selected Financial Data (US$ in millions, translated from GBP £)
Dividends paid 2,074 1,864 1,685 1,512 1,407 1,407
Profit for the year attributable to equity shareholders of the parent company 3,797 4,118 3,158 2,952 2,507 2,621
Sales 23,611 25,666 23,734 20,559 19,945 19,859
Total assets 38,784 41,559 36,347 30,729 29,943 29,258
Equity attributable to equity shareholders of the parent company 11,523 11,661 9,088 8,149 6,167 5,208
Financial Ratios
Retention rate1 0.45 0.55 0.47 0.49 0.44 0.46
Profit margin2 16.08% 16.05% 13.31% 14.36% 12.57% 13.20%
Asset turnover3 0.61 0.62 0.65 0.67 0.67 0.68
Financial leverage4 3.37 3.56 4.00 3.77 4.86 5.62
Averages
Retention rate 0.46
Profit margin 14.26%
Asset turnover 0.65
Financial leverage 4.20
 
FCFE growth rate (g)5 17.94%

Based on: 20-F (reporting date: 2014-06-30), 20-F (reporting date: 2013-06-30), 20-F (reporting date: 2012-06-30), 20-F (reporting date: 2011-06-30), 20-F (reporting date: 2010-06-30), 20-F (reporting date: 2009-06-30).

2014 Calculations

1 Retention rate = (Profit for the year attributable to equity shareholders of the parent company – Dividends paid) ÷ Profit for the year attributable to equity shareholders of the parent company
= (3,797 – 2,074) ÷ 3,797
= 0.45

2 Profit margin = 100 × Profit for the year attributable to equity shareholders of the parent company ÷ Sales
= 100 × 3,797 ÷ 23,611
= 16.08%

3 Asset turnover = Sales ÷ Total assets
= 23,611 ÷ 38,784
= 0.61

4 Financial leverage = Total assets ÷ Equity attributable to equity shareholders of the parent company
= 38,784 ÷ 11,523
= 3.37

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.46 × 14.26% × 0.65 × 4.20
= 17.94%

FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (80,733 × 11.77% – 1,809) ÷ (80,733 + 1,809)
= 9.32%

where:
Equity market value0 = current market value of Diageo PLC common stock (US$ in millions)
FCFE0 = the last year Diageo PLC free cash flow to equity (US$ in millions)
r = required rate of return on Diageo PLC common stock

FCFE growth rate (g) forecast

Diageo PLC, H-model

Microsoft Excel
Year Value gt
1 g1 17.94%
2 g2 15.78%
3 g3 13.63%
4 g4 11.48%
5 and thereafter g5 9.32%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 17.94% + (9.32% – 17.94%) × (2 – 1) ÷ (5 – 1)
= 15.78%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 17.94% + (9.32% – 17.94%) × (3 – 1) ÷ (5 – 1)
= 13.63%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 17.94% + (9.32% – 17.94%) × (4 – 1) ÷ (5 – 1)
= 11.48%