A Share To Help You Sleep

When markets get jumpy it makes sense to look at companies that should prosper in bad times as well as good. Drinks giant Diageo (LSE: DGE) is just such a company.

After all, most of us like a drink regardless of the economic weather, and there's a good chance that Diageo makes at least one of your favourite tipples. Diageo's drinks cabinet includes Johnnie Walker, Gordon's Gin, Guinness, Smirnoff, and many more.

The power of those brands means that Diageo has an excellent competitive position. And a strong financial performance follows on from that. Look at February's interim results.

The standout number was a 16.8% return on invested capital. That's a nice number, but the really attractive feature is that ROIC is on the up, rising 1.2 percentage points.

Diageo also generates plenty of cash. As a result it paid out first-half dividends worth £529m and spent £704m on share buybacks. Remember those figures are for six months only -- not bad for a company with a £25bn market cap! What's more, net debt is only £3.9bn, so there's plenty of scope for further share purchases.

A lot of Diageo's cash comes from North America. Spirits are increasingly fashionable there and first half net sales rose 7% to £1.7bn. Diageo's US performance would probably have been even better were it not for the hurricanes last year which increased costs and disrupted the business.

Growth is even stronger in Asia and emerging markets, and there's plenty of potential for further growth in these areas.

Admittedly, Diageo does have an Achilles heel -- Europe. Sales of alcopops such as Smirnoff Ice are in freefall and Guinness is having a tough time in Ireland. However, Diageo has been aggressively cutting costs in Europe so profits are still rising even though sales have slipped.

The company also hopes to stem the decline of alcopops with a new fruit-based alcoholic drink called Quinn's. It's aimed at twentysomething women who might want to drink it after work.

Profits will also take a modest hit from extra payments into Diageo's pension fund. Diageo plans to pay in an extra £100m this year to reduce the £650m deficit and similar payments may be made in future years. But that's not an enormous sum for a company that is expected to make a £2bn pre-tax profit this year.

Don't get me wrong. I'm not saying that Diageo is going to be a stunning stock market performer in the next few years. After all at 896p, it's trading on a price/earnings ratio of 17 -- hardly a bargain basement rating.

But this is a company with an excellent collection of brands which also generates lots of cash. If markets stay volatile, it should offer relative security for your capital. And if you hold for the long-term -- as all good Fools should -- you could benefit from growth in emerging markets and America's increasing fondness for spirits.