When I am looking for investments to hold for the long term, I try to concentrate on companies with a definite competitive advantage. Diageo (LSE: DGE) shares are a great example of what I’m looking for in a business.
This competitive advantage can be anything. A strong, globally recognised brand or portfolio of brands, large economies of scale that come with size, or a highly respected management team that has a strong track record of creating value for investors.
Diageo shares: the competitive advantage
Diageo owns a portfolio of some of the world’s most recognised alcoholic beverage brands. Brands such as Guinness, Smirnoff vodka and Johnnie Walker whisky.
Johnnie Walker is the world’s best-selling Scotch whisky. The value of the brand alone is estimated at $4.5bn. Guinness’s brand value has been pegged at just under $4bn. Those figures suggest these are some of the most valuable brands in the world, and it would cost billions upon billions of dollars of investment for a competitor to steal this market share.
These figures give me confidence in the strength of the company’s competitive advantage. And they also suggest to me that Diageo shares could be an excellent long-term investment for my portfolio.
Indeed, while it is impossible to predict what the future holds for the global economy, I can say with some degree of certainty, that in 10 years, consumers will still be drinking Guinness and Smirnoff.
Long-term growth
Diageo’s management isn’t just leaning on these products to support the firm’s long-term growth. The group is also on the lookout for new acquisitions. It has acquired a handful of smaller drinks companies recently, improving its customer offering.
I think this initiative should help Diageo shares stay ahead of the competition for the foreseeable future. New deals will also help the group’s bottom line. I think that reinvesting cash from operations into a steady stream of new acquisitions is a great use of shareholder funds.
The firm is also returning cash to investors. It has repurchased stock in the past to boost earnings per share. Diageo shares also offer a dividend yield of 2.4% at the time of writing. I think that looks quite attractive in the current interest rate environment.
The bottom line
Considering all of the above, I am considering buying Diageo shares for my portfolio. I reckon owning the stock as part of a well-diversified portfolio could help me get rich in the long run.
Over the past decade, the stock has yielded an annual return for investors of over 11%. At this rate of return, I calculate it would take 6.5 years to double my initial investment. There are only a handful of other companies that could produce the same kind of return, in my opinion. That’s why Diageo shares stand out to me as a long-term buy.
