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Is Diageo plc Set To Surge, And Stick, Above 2000p Next Year?

Too many people tell me “I hate Christmas”. All those family feuds, last minute shopping sprees, and car journeys in drizzly, dark, winter days. And then there’s Christmas jumpers. Oh, and brussels sprouts.

But I actually like Christmas. After all, you can never listen to Fairytale of New York too many times. It’s a great time to have a break from work and cosy up to the family on those cold December nights. And, to me, any excuse for a party – and a drink – is a good excuse.

Diageo: the gift of Christmas

From pagan festivals through to the modern, commercialised celebrations of today, late December has always been the right occasion for a booze-up. Which means that companies like Diageo  (LSE: DGE) are set to rake in the cash at this time of year.

Diageo’s strengths are in beer and spirits like whisky and vodka, with brands including Guinness, Tanqueray and Smirnoff. And while many companies have suffered since the turn of the century, this firm’s shares have been on the up. In fact, it has been one of the best FTSE 100 investments of the past 15 years.

But wait – the momentum that drove the shares up a decade ago seems to have slowed. Since early 2013 the share price has been treading water and hasn’t been able to sustain a break above 2000p. Why is that?

While Diageo is a leading player in alcoholic beverages in Europe and North America, you could argue that its brands have pretty much reached saturation point in these markets. The rapid growth in earnings and share price has thus levelled off, even though it’s one of a decreasing number of FTSE 100 companies that has robustly healthy balance sheet year in and year out.

The next growth spurt

Diageo still churns out fat profits year after year and that makes it one of the FTSE 100’s most consistent performers. This is a highly cash generative business that can be relied to produce a tidy dividend. And the current P/E ratio of 19.45, and income of 2.83% seems, if not cheap, at least fairly valued.

The question people will ask is where Diageo’s next spurt of growth is going to come from. And the obvious answer is emerging markets. Sales of spirits in countries such as China, India and Vietnam are currently very low, and the growing middle classes are expected to go on a spending spree, even with government clampdowns on conspicuous consumption in the key China market. Branded consumer products such as those sold by Diageo are likely to do well.

That’s why I think it remains a good long-term buy. The flagship brands it sell wills be popular with the same middle class consumers that buy into other well-known western brands such as iPhone, Burberry and Persil.

It’s been difficult to find companies in the stock market that are still strongly profitable, and also have the promise of growth into the future. I think Diageo ticks both those boxes and should be one consistent performer to tuck away in your portfolio.

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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the 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.