Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at Diageo (LSE: DGE) (NYSE: DEO.US)
What is the sustainable competitive advantage?
Diageo’s competitive advantage lies in its portfolio of 13 strategic brands, seven of which are market leaders with a broad consumer appeal across all continents.
In particular, Diageo’s drinks cabinet contains the likes of Guinness, Smirnoff and Johnnie Walker, which are the worlds bestselling stout, premium vodka and scotch whiskey brands.
Moreover, as these brands are world leaders, with an established customer base and in many cases, household names, Diageo is able to place a premium price on its products and maintain a gross profit margin of 40%. This is a great trait in a buy-and-forget investment as Diageo’s brands virtually sell themselves.
Additionally, as the world’s largest distiller, Diageo is able to achieve economies of scale and low distribution costs that its smaller peers cannot.
Company’s long-term outlook?
The alcohol industry has very high barriers to entry. Strict control over the sale of alcohol in many countries, coupled with well-established existing brands, means that many new entrants to the market find it hard to get off the ground. However, this is positive for Diageo as the company is unlikely to see any serious threat to its dominance over the industry any time soon.
Furthermore, rising incomes in emerging markets are boosting the demand for Diageo’s premium spirits, especially whiskey.
In addition, even though the negative effects of drinking alcohol are well known, overall consumption continues to rise around the world. Indeed, global alcohol sales expanded 1.6% last year.
What’s more, 99.5% of the Chinese spirit market is still dominated by the national liquor, baijiu, leaving plenty of room for Diageo to expand.
Having said that, the one thing that concerns me about Diageo is the recently announced retirement of CEO Paul Walsh, who is stepping down after 13 years at the company.
Paul Walsh has been responsible for transforming Diageo into the world’s largest distiller, and over his 13-year leadership the company’s share price has risen 365%. Furthermore, over the same period, Diageo’s dividend has grown 10% annually. Although it is unlikely that the retirement of Walsh will lead to a fall in investor returns, it is likely that Diageo’s decade of growth could be coming to an end.
All in all, despite the retirement of Paul Walsh, I believe that Diageo is a great share to buy and forget. Diageo operates in a highly defensive industry with high barriers to entry and the company has a portfolio of well-known premium liquor brands, which almost sell themselves.
So overall, I rate Diageo as a very good share to buy and forget.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.