Monday, November 28, 2005

Geico and GenRe buy Diageo shares (DEO)

As the article reveals, Buffett (or Lou Simpson) has purchased 15 million shares of Diageo (DEO).

What is the attraction? Diageo has a market cap of about 25 billion British pounds. Enterprise value is approximately 29 billion. Free cash flow for the year ended June 30,2005 is about 2.6 billion pounds for a free cash flow yield of 9.1%. Free cash flow for the last five years has totalled in excess of 12 billion pounds. In other words, for a holding period of only five years, one would have received in free cash flow about 42% of your investment! For an investment horizon of forever, as WEB envisions, he could own it gratis after 10 years. In the meantime, the current dividend yield on the stock is 4.6%.

Diageo has a ROIC of over 12%. In the last five years, Diageo has bought back about 7.5 billion sterling of stock. During that time, about 2.3 billion in debt was paid down.

Brands include Johnnie Walker, Smirnoff, Tanqueray,Guinness, J&B, Baileys, Capt Morgan, and Cuervo. Given these brands and BRK's position in Anheuser Busch, it will be difficult to avoid enriching Buffett and happy shareholders most weekends and through the holiday season!


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