Why I Love Diageo Plc

Claive Vidiz whisky collection

There is something to love and hate in almost every stock. I’m in high spirits today, so here are five things I really love about global drinks giant Diageo (LSE: DGE) (NYSE: DEO.US).

Everybody loves a winner

It’s hard not to feel the love for a stock that has risen 78% since I bought it less than two years ago in October 2011. I didn’t expect that kind of growth from what I considered a solid portfolio holding. Yes, its growth rate has slowed lately, but Diageo still topped me up with a further 18% growth in the past 12 months. I’ll drink to that. 

It’s a premium strength business

Successful companies often struggle to keep the momentum going, but Diageo delivered net sales growth of 5% in the year to June 2013, according to its interim results. That included that sales of 5% in North America and operating profit up 9%. Free cash flow was £1.5 billion, despite a £400 million contribution to the UK pension scheme. Earnings per share (EPS) growth was also healthy at 11%. Operating profits grew 8%. Clearly, Diageo hasn’t lost its fizz.

Emerging markets are thirsty

Emerging markets make up 42% of Diageo’s business, and they’re getting thirstier. I’m wary of any FTSE 100 company that doesn’t have an emerging markets strategy, despite current troubles in China, Brazil and India. Diageo’s net emerging markets sales grew 11% and acquisitions, including the Brazilian Ypioca brand, added £233 million. Better still, emerging market operating profits rose 18%. The biggest market for Guinness may surprise you: Nigeria.

Its dividend isn’t as bad as it looks

I’ll admit it, I don’t love Diageo’s, which is currently an insipid 2.3%, below the FTSE 100 average of 3.5%. That’s what happens with strong growth stocks, the yield often fails to keep up. I shouldn’t complain too loudly, because I’m actually getting 4.2% on my original investment, having bought at £11.35 rather than today’s price of £20.20. Diageo’s dividend is covered 2.2 times, which offers scope for growth. Management recognised this in July, with a 9% hike to 47.40p per share. As a long-term investor, I’ll be hoping for more of the same.

It’s the brands, stupid

Diageo has harnessed the power of global brands with names such as Gordon’s, Tanqueray, Baileys, Captain Morgan, Pimm’s, Smirnoff, Johnnie Walker, Guinness, Red Stripe, Kilkenny and Blossom Hill. That list includes the world’s best selling Scotch, liquer, vodka and stout. Wisely, it has balanced this by investing in local premium brands, particularly in emerging markets, giving its drinks list depth, taste and character. 

Diageo isn’t a slammer of a stock right now. After the recent share price party, it looks like something to lay down for many years to come. And that’s another thing I love about it.

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> Harvey owns shares in Diageo.