Drinks giant Diageo remains an attractive share for those who want to sleep soundly at night.
I wrote in June that Diageo
(LSE: DGE)
was "a share to help you sleep soundly" and I haven't changed my mind after today's annual results.
The world's biggest booze company boasted that net sales had risen 9% to £7.3bn while underlying earnings had climbed 10% to 50.5p per share.
Diageo is clearly delivering decent growth, but the market isn't impressed and the shares are down 30p this morning at 929p. Today's fall follows a marked rise in recent days -- it looks like some investors thought Diageo was going to beat expectations and have been disappointed by today's numbers.
Another possible factor behind today's fall is continuing worries about Diageo's European business. Operating profits are up 5% at £737m, but sales are flat. All the profits growth has come from cost cutting, and sooner or later Diageo won't be able to find any more costs to cut.
Of course, the best outcome in Europe would be higher sales, but that looks like a tough challenge. Diageo still hasn't worked out a way to reverse declining Guinness sales in Ireland following the smoking ban in pubs, while sales of alcopops have continued to fall in the UK.
Six months ago, Diageo's solution to the alcopop problem was a new fruit-based drink called Quinn's, which is aimed at twentysomething women. Ominously, the new tipple isn't mentioned in today's statement, and even worse, none of the young female Fool crowd ever ask for Quinn's when I buy them drinks after work. (They have expensive tastes, that bunch: G & Ts, whisky and cokes, nothing simple like half a lager.)
So why am I still positive about the company?
It's partly because Diageo has a collection of strong brands. They include Johnnie Walker,Gordon's Gin and Smirnoff. People will continue to drink these products regardless of the economic weather.
I'm also positive about the US business. Organic net sales jumped 7% to £2.5bn and adjusted operating profits rose 6%. Diageo's spirits brands have further potential to grow in the US, and the recently acquired Chalone wine brand has got off to a good start.
And there's even greater growth potential in the rest of the world where net sales jumped 13% to £2.2bn.
What's more, Diageo has a healthy balance sheet. Net debt edged up £380m to £4.1bn, an attractively low figure for a £26bn company. Diageo spent £1.4bn on share buybacks last year and expects to spend a similar figure this year. The company also paid out dividends worth £864m last year and the share is now trading on a reasonable yield of 3.3%.
Of course, an investment in Diageo isn't as safe as putting your money in a bank account or buying government bonds. And an historic price/earnings ratio of 18 is well above the Footsie's average p/e of 12.
But I believe that the combination of a defensive business and significant growth potential mean there's a good chance that Diageo will be a solid long-term performer in the years ahead. Not the stuff of nightmares.
Are you looking for more blue-chip stock ideas? Take a free trial to Champion Shares, our share-tipping newsletter. Our last three picks all have market caps greater than £1 billion.
