It’s been a disappointing year for investors in Diageo (LSE: DGE) (NYSE: DEO.US), with the alcoholic beverages company seeing its share price fall by 7% over the course of the year while the FTSE 100 is flat over the same time period. Indeed, the key reason for the fall has been uncertainty surrounding the emerging market growth story, with data released from China in particular being slightly behind forecasts.
However, Diageo still offers great potential and could be a long-term winner. Here’s why.
A Great Industry
A key attraction of investing in alcoholic beverages companies such as Diageo is their relative stability. Indeed, whether the economy is performing well or badly, whether people are in work or out of work, alcoholic drinks are demanded. So, while not quite as stable as a utility company, Diageo is not far off being as stable as a tobacco company. That’s good news for long-term investors because, put simply, it means fewer surprises and more stability. For instance, Diageo has increased its bottom line in every one of the last five years, posting average increases of 10% per annum in the process.
A Better Price
Having fallen by 7% in the last six months, Diageo now offers far better value for money. For example, it trades on a price to earnings (P/E) ratio of 18.8 which, although higher than the FTSE 100’s P/E of 13.8, benefits from the previously mentioned stability. In other words, even if the global economy suffers another dip as interest rates begin to rise, companies such as Diageo should continue to deliver above-average earnings growth. That added stability is included in the price, which means that a yield of 2.8%, although still higher than inflation, is not particularly attractive.
Looking Ahead
With Chinese GDP figures due out this week, we should know more about the state of the world’s second largest economy. Irrespective of those figures, though, China presents a top-notch opportunity for companies such as Diageo, as the economy moves towards a focus on consumer spending. Greater wealth and a growing middle class are expected in the long run and, even if China’s second quarter GDP figure is behind forecasts, the country still presents a superb long-term opportunity. With a strong foothold in China already, Diageo could have a great 25 years — during which time it could make a positive contribution to paying off your mortgage.
