Such is the scale of Diageo‘s (LSE: DGE) formidable brand power around the world, I believe that investors can buy the share today and be confident of enjoying brilliant returns a long, long time.
Brands like Baileys Irish cream, Captain Morgan rum and Johnnie Walker whisky are without peer. Even in tough economic times Diageo’s drinks remain formidable cash cows and leaders in their respective categories, and these qualities lay the groundwork for strong and sustained earnings growth.
Ah, you may say, not necessarily, and you could point to the mild profits reversals of recent years as evidence of this. Expensive follies like the acquisition of Chinese baijiu brand ShuiJingFang in 2012, and the temporary impact created by anti-corruption measures in China on alcohol demand, were the chief drivers behind this.
Mastering the growth markets
Diageo got burned, but it seems to be learning from the failures around its monster Asian acquisition and sales in China are now back on the march. Indeed, organic net sales in the country rocketed 32% during the six months to December, a result that drove comparable sales growth across the whole of the Asia Pacific region to 7%.
And over the long term, I’m expecting rampant population growth and bulging disposable income levels to keep demand for the FTSE 100 firm’s labels soaring. What’s more, these same favourable demographic drivers are also helping Diageo’s top line to jump in other key emerging markets. In Latin America, organic net sales also grew 7% in the first half of fiscal 2018, with aggregated sales across the Paraguay, Uruguay and Brazil (PUB) territory, as well as the other Latin American powerhouse of Mexico, growing by double-digit percentages in July-December.
Investment paying off
I have spoken before about the vast sums Diageo has thrown at brand development to keep revenues soaring across all of its major regions. This isn’t the whole story though and thanks to its large cash flows, the beverages behemoth has not been put off by the problems surrounding the ShuiJingFang takeover and it continues to buy up well-loved brands all over the world.
Last August it bought Casamigos, the fastest growing super-premium tequila brand in the US, for a fee that could eventually rise to $1bn. Diageo has targeted the rapidly-rising premium segment in particular, and this acquisition in the huge North America market could prove a masterstroke.
A great ‘all-rounder’
All of these things mean that City brokers are expecting Diageo to keep generating strong earnings growth for the foreseeable future. Forecasts point to a 6% year-on-year profits improvement in the 12 months to June 2018, and an additional 9% rise is predicted for fiscal 2019.
So unsurprisingly, these bright estimates, combined with the Footsie favourite’s robust balance sheet, are also expected to keep its long-running progressive dividend policy trucking. Last year’s 62.2p per share reward is expected to rise to 65.5p in the current year, and again to 70.6p in the upcoming year.
Investors can find larger yields than Diageo’s 2.4% and 2.6% for fiscal 2018 and 2019 respectively. A forward P/E ratio of 24 times also isn’t that appealing on paper. Still, I would argue that, for those seeking improving returns year after year, the drinks play remains a very attractive blue-chip to buy today.
