I used to love holding Diageo (LSE: DGE) (NYSE: DEO.US) when chief executive Paul Welsh was at the helm. His free-booting, acquisition-laden tenure sent the share price soaring at twice the pace of the FTSE 100.
The sense of adventure waned after Ivan Menezes took command, and downplayed the buying spree in favour of his ‘Drink Better’ premium brands strategy. It looked like the company had lost its thirst for rapid growth, and a yield of 2.5% wasn’t enough to keep the party going. So I took my profit, and went in search of another party.
Diageo is back in the party spirit, after moving to increase its stake in Indian alcoholic drinks maker United Spirits. It has offered £1.1 billion for a 26% stake in the company, which would take its total shareholding to around 55%. I’m delighted to see Diageo return to its buccaneering ways. Drink Better, good. Buy Better, best.
Diageo didn’t completely renounce retail therapy, having bought Chinese brewer ShuiJingFang and Brazilian cachaça manufacturer Ypióca over the last year. It has also been hanging out with the celebs, launching premium tequila brands with rapper-turned-businessman Puff Daddy, aka Sean Combs, and developing Scotch brand Haig Club with David Beckham. Both of which demonstrate a company willing to break new ground.
Emerging Worries
After a spell of steady decline, the stock has climbed 5% in a month. Like FTSE 100 brewing giant SABMiller, it has benefited from a rotation into defensive stocks, as investors lose their appetite for risk, and tensions mount in the Ukraine. This bodes well for its continuing appeal, should the economy had for a rocky summer.
It still faces challenges. A recent note by Credit Suisse warning of tougher times for SABMiller dampened Diageo’s animal spirits earlier this month. It had earlier posted a disappointing half-year performance in emerging markets, following the anti-extravagance ‘gift giving’ crackdown in China and troubles in Thailand. Emerging markets won’t always give the share price a shot.
Still A Premium Stock
Diageo’s real strength is its global diversification. It can withstand falling beer sales in Nigeria and Ireland when sales are rising in its key US spirits division. And despite my carping, Drink Better still has its merits, with sales of super and ultra-premium brands growing strongly, and reserve brands up 18.5% in half a year.
Trading at 1907p, Diageo is still more than 10% below its 52-week high of 2136p. Although at 18.4 times earnings, against 13.25 times for the FTSE 100, this isn’t exactly happy hour. Especially since the yield remains stuck at 2.5%, uncomfortably below the FTSE 100 average of 3.63%. Diageo has to work hard, play hard, to justify these high numbers. Its move to extend its stake in United Spirits shows it still has the spirit for the challenge.
