The Motley Fool

Why Diageo plc Is A Top ISA Buy

If you’re like me, you want to own companies that stand a pretty good chance of growing (and growing your money!) without causing you much heartburn along the way.

One easy way to do this is to seek out and buy a piece of some of the world’s greatest companies and brands, and today I’ll profile Diageo (LSE: DGE) (NYSE: DEO.US), a share that ticks all the boxes for me and could be a great candidate for your ISA this year.

diageoA case of drinks

It usually takes decades to build brands that dominate their markets, so when you have an already entrenched player like Diageo that has the scale to keep expanding, I think that’s a company worth owning for the long haul.

Diageo is the world’s largest spirits company, selling into 180 countries and with a huge range of spirits brands, including six of the world’s 20 biggest sellers. It’s tickling the taste buds of drinkers worldwide with popular brands Smirnoff, Johnnie Walker, Bailey’s and Crown Royal, each of which is the world’s best-selling brand in its category. Diageo also owns Guinness, the world’s best-selling stout.

Diageo’s management is investing heavily in its ‘superbrands’ — those that it sees as its core growth drivers.

The company is also investing heavily in its supply chain and emerging markets, especially in Africa. Diageo’s biggest brands carry global weight, and their aspirational positioning has made them hot in emerging economies with growing middle classes.

The numbers, please

Diageo’s stable of premium brands and worldwide distribution network rakes in more than USD$18 billion in sales each year. Because of Diageo’s impressive sales and unmatched scale, the company is able to clock an impressive 62% gross margin.

But those margins don’t come cheap: To maintain the brand loyalty that makes Diageo’s pricing power possible, the company spends about 16% of its sales on marketing each year. That’s a lot of money, but it is well spent to maintain and expand Diageo’s moat.

Most recently, the global drinks giant reported that sales were up 2% overall, driven by a near-5% increase in North American and a recovering Western Europe market.

But perhaps the more exciting long-term play here is Diageo’s growth in emerging markets.

Diageo already derives about 42% of its operating profit from Africa, Eastern Europe, Turkey, Latin America, the Caribbean and the Asia Pacific, making such emerging markets important to the company.

And although growth in emerging markets has slowed for many companies — including Diageo — I expect this will not be a factor long term. Because I think Diageo will continue to use its size to expand wisely into population-dense areas as their economies emerge and mature.

Diageo’s dividends

Another great case for owning Diageo is that is pays a nice dividend.

If we assume Diageo’s share price does nothing for the next 10 or even 20 years, you’re still looking at a 2.9% dividend yield. Name one bank that can match that.

Analysts expect the dividend payout to rise to 51.4p per share in 2014, and 56.3p for 2015.

Diageo has delivered good dividend growth over the past five years, and the rate of growth has accelerated about 6-7% year on year.

In addition to the hefty dividend it pays out with the cash flow that its booze sales generate, the company likes to buy up brands that are popular in their local markets. Its recent acquisition of Brazil-based Ypióca, the second-largest brand of cachaça liquor in the world by value, is a good example.

The £11,520 question

Any investment in Diageo today is therefore an investment in the company’s biggest brands — and its ability to keep selling them to more people, in more countries.

But with a new allowance of £11,760 coming our way in April, and with many of us still left with some of this year’s allowance yet to be used, it’s a great time to be thinking about how to add good quality shares like Diageo to our ISAs.

I believe Diageo, with its warehouse of superbrands and truly global business, is a great long-term investment for ISA investors.

And if you’d like to see other candidates for your ISA, you should consider shares that you’re happy to ‘buy and forget’.

That’s why our top analysts scoured the FTSE 100 to bring you five names that they believe can form the heart of your portfolio, including a Big Pharma dividend champion, a giant with two billion consumers every day, an omnipresent high-street hero , a defensive Goliath and a power play with a 5%+ yield.

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The Motley Fool and Jill do not own any shares mentioned in this article.