Cash is king for Diageo investors

No reason to buy Spurs despite good on-field form; Backing Game is like believing in Santa Claus
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The Independent Online

Ker-ching. An extra $2.14bn (£1.2bn) has landed in the coffers at Diageo, the global drinks giant whose brands include Guinness, Baileys, Johnnie Walker whisky, Gordon's gin and Smirnoff vodka.

Ker-ching. An extra $2.14bn (£1.2bn) has landed in the coffers at Diageo, the global drinks giant whose brands include Guinness, Baileys, Johnnie Walker whisky, Gordon's gin and Smirnoff vodka. Yesterday the group sold two-thirds of its stake in General Mills, a US food company, paving the way for a new round of share buy-backs.

It is an impressive portfolio of global brands, augmented by an array of local market leaders and some growing wine brands as well.

Not all the plates are kept spinning at the same time. Sales of Guinness in its native Ireland are declining. Smirnoff Ice has been the superstar of the alcopop market created over the past decade, but has since gone into reverse. Product innovation and innovative marketing campaigns will be vital to turn these situations around.

Yet it would be unfair to concentrate on the negative. The majority of the global brands are performing robustly. Captain Morgan rum has done extraordinarily well under Diageo's ownership. And there are positive developments in many areas, including in North America where the company is taking greater control of its marketing and distribution. Guinness is catching on in parts of Africa. And as wealth is created in Asia there is the opportunity to persuade people to switch from local staples to Diageo's premium whiskies.

The first General Mills share sale yesterday came earlier than many had expected and takes Diageo another step closer to fully exiting the food businesses it used to own. Hopefully it will also extricate itself soon from $850m of loan guarantees to its old subsidiary, Burger King, and then a more formal return of cash to shareholders might also be on the cards.

Diageo already generates more cash than it can invest in its core business, making it a 40 per cent-proof investment, worthy of inclusion in most rounded portfolios. The shares are fully valued at 15 times current year earnings forecasts, but the share buy-back programme and a 4 per cent dividend yield should keep them aloft. Hold.

No reason to buy Spurs despite good on-field form

In a week when Manchester United can receive a bid approach despite its shares being valued at 40-odd times the company's earnings, it seems faintly ridiculous to try to examine the investment case for shares in its Premiership rival Tottenham Hotspur in terms of its financial performance.

That, as we saw in Spurs' annual results yesterday, was poor. Disappointing results on the field and disillusionment among many fans translated into lower merchandise sales and TV revenues, and falling turnover and operating profits. Only the pre-tax profit line looked less sickly, since the previous year had been disfigured by the accounting effects of player sales, and losses reduced from £7.1m to £2.5m in the year to 30 June.

In an unprecedented flurry of transfer activity, 17 players left the club and 21 joined over the course of the year. And it is reflected in a much better start to this season, with the club lying fifth in the Premiership. It would be too early to start salivating over European competition but the mega-bucks that come with that sort of breakthrough would - as usual - be swallowed up by increased player bonuses and wages.

Which is as it should be, because football is not about making money, it is about trophies.

Avoid.

Backing Game is like believing in Santa Claus

What are Game shareholders going to get for Christmas this year? The computer games retailer - with 400 outlets across the UK and Ireland - makes all its profit over the festive period. Which means that, when the figures are unwrapped in the new year, they could contain everything investors are wishing for, or a nasty profits warning.

Game's past record is mixed, so it is no guide to this year's performance. First-half results yesterday were better than expected, but they showed a loss of £5.9m. Few top-quality games titles were launched early in the year, so shoppers weren't lured in. From here to Christmas, the release schedule is stronger but Game still says it expects like-for-like sales to be down in the second half.

Games consoles have come right down in price, with the PlayStation2 and Xbox retailing for about £100 now. This ought to make them an even more popular present this year, but the risk is that it will be the supermarkets which make them a really mass market product. There is also sure to be vicious price competition again on software and Game itself says "the market has an ever increasing number of participants across the retailing spectrum".

Investors who are bullish of this stock point to the launch of next-generation consoles from Sony and Microsoft around the end of next year, which could generate a new buying frenzy to the benefit of Game. It might, although there is also the suspicion that the take-up of gaming by the adult population, which benefited PS2 and Xbox, might have gone as far as it can.

Game shares, at 64p, look cheap if you believe the company will deliver its earnings forecasts. But that's a bit like believing in Father Christmas.

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