When I learned that 99.7% of Warren Buffett’s immense wealth was created after the age of 52, I was astonished. The world’s most recognisable investor hadn’t even hit his stride till middle age. This fact highlights the importance of an extended time horizon while investing.
In my opinion, the amount of time an investor can spend staying in the market is just as important as her ability to minimise risks and maximise returns. Maintaining a steady rate of return for extended periods of time is the key to benefitting from the power of compounding.
With this in mind, investors might want to turn their attention to the so-called ‘forever stocks’ – companies that can generate decent returns forever. And the best way to spot a forever stock is to start with companies that have seemingly been around forever. One such company is spirits giant Diageo (LSE: DGE).
Created by merging Guinness and Grand Metropolitan in the 90s, the company can trace its roots back to 1759. Since its initial public offering in 1995, the stock has delivered a 655% return in price appreciation alone. With dividends included, the total shareholder return would be a lot higher.
With an average beta of 0.43 over the past three years, Diageo has been a remarkably steady and lucrative bet for long-term shareholders. But can the stock keep going at the same rate forever? Here’s a look at the dynamics of Diageo’s industry and the company’s underlying fundamentals.
Drinking culture
Consuming alcohol on a regular basis may not seem as popular as it once was. Investigators from the Centre for Addiction and Mental Health, in Toronto, Canada, and the Technische Universität Dresden, in Germany found that per capita alcohol consumption across Europe declined 12% between 2010 and 2017.
However, while Europeans and North Americans are drinking less, Asian consumers are more than offsetting this trend. Over the same period, alcohol consumption in Asia grew by 34%, while the global rate of consumption is up 70% over the past 20 years.
However, while Europeans and North Americans are drinking less, Asian consumers are more than offsetting this trend. Over the same period, alcohol consumption in Asia grew by 34%, while the global rate of consumption is up 70% over the past 20 years.
Diageo has been diversifying its operations over the same period and the company now derives 20.7% of its revenue from Asia, according to its latest annual report. Diageo is a global conglomerate, which means the escalating rate and premiumisation of alcohol consumption across the world will continue to benefit the company for the foreseeable future.
Fundamentals
At just under 2%, the firm’s dividend yield is far from impressive. However, the company has a manageable debt burden (about 50% of total assets), a lucrative rate of return on equity (27%), robust interest coverage ratio (10.6), and a low payout rate (54.5%).
Bottom line
There seems to be plenty of reason to believe the alcoholic beverages industry will continue to expand at a steady rate for the foreseeable future. Diageo, meanwhile, is the industry’s largest conglomerate with a diverse portfolio of brands backed by a robust balance sheet and attractive margins.
The dividend yield may be low at the moment, but the company’s financial strength and the industry’s long-term outlook make DGE one of the most dependable dividend stocks on the FTSE 100. I believe it fits the description of a ‘forever stock’.
