Diageo (LSE: DGE) (NYSE: DEO.US) has fuelled its growth over the last 10 years with a number of well-judged and successful acquisitions.
It’s too early to say whether the firm’s latest deal, a 50:50 joint venture with hip-hop mogul Sean Combs, better known as Diddy (formerly Puff Daddy and P Diddy), will be successful, but I think that the signs are good.
Combs and Diageo have each bought 50% of premium tequila brand DeLeón, which was founded in 2009 by a former American banker, Brent Hocking. Diageo has been looking for a tequila deal since it lost the distribution rights to the world’s largest tequila brand, Jose Cuervo, last year, following the failure of a rumoured $3bn bid to buy the firm in 2012.
Bottles of DeLeón currently retail for between $120 and $1,000 per bottle, and although just 10,000 cases of the tequila were sold last year, Diageo and Combs believe that the potential market is much larger.
Can Diddy deliver?
If you’re surprised that a firm Diageo’s size has been willing to take a 50:50 stake in DeLeón with an individual celebrity, then consider this.
Since Combs signed up to market Diageo’s Cîroc premium vodka in 2007, sales of the fashionable tipple have increased 40-fold, from 450,000 litres per year to around 18 million litres per year.
Diddy’s celebrity marketing power played a significant role in this success, and I wouldn’t bet against a repeat with DeLeón — but does this make Diageo a buy?
Still costly after all these years
Diageo is one of those companies whose long-running success consistently makes it seem expensive. The firm currently trades on a forecast P/E of 17.5 and offers a prospective yield of 2.7%, compared to 14.9 and 3.2% for the FTSE 100.
Figures like this have prevented me buying shares in Diageo, but I may be guilty of short-sightedness: Diageo’s dividend has grown by an inflation-beating average of 6.7% since 2007, and this has been matched by average revenue growth of 7.2% per year and post-tax profit growth of 8.8% per year.
Analysts’ forecasts are still bullish for Diageo, but I’m not sure. The firm’s pre-tax profits were flat last year, and earnings per share are being flattered buy Diageo’s share buyback programme.
In my view, existing shareholders should sit tight, but potential new shareholders, like me, might want to hang back a little longer, to see if Diageo starts to look more affordable in 6-12 months’ time.
