Diageo plc: A Perfect Share To Retire On

Diageo plc (LON:DGE) has all the traits of a great long-term investment.

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There is no doubt that planning for retirement can be a tough task. Indeed, trying to find shares for your retirement portfolio that can continue to outperform the market for one, two or even four decades from now, can be an almost impossible undertaking. That said, all we need to do is to look to the worlds greatest long-term investor, Warren Buffett to see that investing for the long-term can be simple.

All of Buffett’s greatest investments have three key qualities, a sustainable competitive advantage, low valuation and dependable management. Companies that meet these criteria are rare but I believe that Diageo (LSE:DGE) (NYSE: DEO.US) fits the bill perfectly. 

Sustainable competitive advantage

A sustainable competitive advantage that makes it difficult for peers to wear down market share and profit, is key for any company that wants to outperform over the long-term.

In my opinion, Diageo has one of the strongest sustainable competitive advantages around, as the company produces some of the worlds bestselling beverages. For example, Diageo owns Smirnoff Vodka, the world’s leading spirit brand as well as and Johnnie Walker Scotch whiskey, the world’s third most popular spirit brand. Actually, Johnnie Walker is not just one of the world’s bestselling spirits but the brand is also one of the fastest growing. Accord to Interbrand since 2000, the value of the Johnnie Walker brand has risen approximately 230%, an annual growth rate of 10.5%, outpacing the wider market for alcoholic beverages, which has only expanded at around 5% per annum during the same period.  

Further, the reputation and heritage of these brands, as well as their entrenched position in the market mean that they virtually sell themselves. The Johnnie Walker brand for example, can trace its roots back to the early 1860s and this in part explains why some consumers will pay upto £300 for a bottle of the sought after blend.

It’s this kind of heritage and global dominance that gives Diageo its sector leading competitive advantage.  


Even with all these highly desirable traits, for some. Diageo may look expensive as the shares are trading at a historic P/E ratio of 17.5. However although this may look expensive compared to the rest of the UK market, in practice Diageo is cheap compared to its international, and smaller peers, which should be used as a comparison.

In particular, Beam, the maker of Jim Beam whisky was just taken over while it was trading at a historic P/E of 37, considered a fair price for the company. Additionally, Brown-Forman the maker of Jack Daniels whiskey is currently trading at a P/E of 28.3 and Pernod Ricard, owner of the Absolut Vodka, Beefeater Gin and Chivas Regal brands currently trades at a P/E of 18.2.

With a market capitalisation of more than £46 billion, Diageo is twice the size of Pernod Ricard and four times the size of Brow-Forman, so the company should be trading at a significant premium to its peer group. What’s more, Diageo’s management believes that over the next two decades, approximately 2 billion people around the world will be able to afford the company’s beverages, so the company’s sales could be about to see a period of explosive growth.  

Well managed

Even though Diageo’s brands, to some extent, sell themselves, management cannot afford to be caught napping on the job. Actually, Diageo is an extremely well-managed company. In particular, despite numerous bolt-on acquisitions during the past few years, Diageo is still living within its means and total debt has remained constant for the majority of the past five years.

Moreover, Diageo is funding most of its acquisitions from free cash flow and the company’s dividend payout is covered around three times by cash from operations, excluding working capital charges. 

Foolish summary

So all in all,Diageo may not be everyone’s cup of tea, but the company’s wide moat, defensive nature and robust cash flows make the company look like a solid long-term investment for your retirement portfolio.  

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Rupert does not own any share mentioned within this article.

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