Can Diageo plc Help You To Retire Rich?


2014 has been a major disappointment for investors in Diageo (LSE: DGE) (NYSE: DEO.US). Indeed, shares in the global alcoholic beverage company have sunk by 12% since the turn of the year. Even though the FTSE 100 has also performed poorly during the course of the year, it still beats Diageo, being down 4.5% over the same time period.

However, Diageo remains a high-quality company with strong future potential. As a result, now could be an opportune moment to add it to Foolish portfolios and, perhaps more importantly, it could help you to retire rich.

Brand portfolio

The major reason why Diageo has a bright future is the strength of its brands. Indeed, the company has an array of premium spirit brands in its locker; from Smirnoff to Johnnie Walker, Diageo has exposure to the biggest spirits markets through some of the most popular brands in the world.

This positions Diageo superbly for long-term growth. Not only are premium spirits highly popular (and becoming more so) in the developed world, in emerging markets they are continuing to show further strength. Furthermore, as the wealth of developing economies continues to grow, demand for premium spirits should keep pace. This puts Diageo in an enviable position of having exposure to a wide range of lucrative markets and, as a result, it looks set to benefit from a substantial economic tailwind.

However, strong brands also means greater customer loyalty. While in other industries, brand loyalty may not be so strong, in the world of premium spirits consumers tend to stick to their favourite brands – even if the macroeconomic outlook is unfavourable. In other words, Diageo’s brand portfolio allows it to not only maintain improved pricing over the medium to long term, it also means that, during economic downturns, demand for its products should remain relatively robust.

Looking Ahead

Clearly, shares in Diageo have disappointed in 2014. However, the stock still trades at a generous premium to the wider market, with shares in Diageo having a price to earnings (P/E) ratio of 17.7 versus just 13.1 for the wider index.

This may lead many investors to think that shares in Diageo are overpriced. However, by the company’s historical standards, they seem to offer good value for money and, with another global alcoholic beverage company, SABMiller, trading on a P/E ratio of 22.2, there could be scope for an upward rerating to Diageo’s current valuation.

So, with a highly appealing portfolio of brands and a relatively attractive share price, Diageo could turn poor performance around and help you to retire rich.

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Peter Stephens has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.