Diageo plc (ADR) (DEO)

TMFBigVice (95.17) Submitted: 7/24/08 1:18 PM : Start Price: $71.28 DEO Score: 9.89

Diageo (NYSE: DEO)

Todd Wenning

Alcohol isn't as despised by the general population like tobacco is, but that's largely a matter of timing (see Prohibition). Take a swig of ol' grandpappy's cough syrup in public today and you'll get a completely different reaction than if you'd lit up a cigarette. Alcohol is still a vice, however. There are no two ways about that. And when it comes to picking vice stocks, I love those with best-of-breed brand names in its bullpen.

UK-based Diageo is chock full of them. Consider:

Beer: Guinness, Red Stripe, Harp, Smithwick's
Champagne: Dom Perignon, Moet & Chandon
Cognac: Hennessy
Gin: Gordon's, Tanqueray
Liqueur: Baileys, Romana Sambuca, Godiva brands
Malt Beverages: Smirnoff Ice
Rum: Captain Morgan
Schnapps: Black Haus, Goldschlager, Rumple Minze
Tequila: Jose Cuervo
Vodka: Smirnoff, Ciroc, Ketel One
Whiskey/Scotch: Crown Royal, J&B, Johnnie Walker, Seagram's
Wine: Sterling

Many of these premium liquor brands are the "first name" that pops into consumers' mind -- "Rum? Captain Morgan. Tequila? Cuervo." That's the sort of brand awareness that makes Diageo top-dog in this market.

Diageo has solid management with CEO Paul Walsh (7 years on the job) and CFO Nick Rose (9 years) running the show together for some time now. With the average CEO sticking around for less than five years these days, Walsh and Rose's length of stay is encouraging. They've also established a tradition of being shareholder friendly -- over the past decade, Diageo returned over $20 billion in share buybacks and in 2007 alone paid $1.7 billion in common dividends. The company's stated dividend policy is to grow payout by 5% annually, which will make dividend-sensitive investors happy but also gives Diageo enough cash to reinvest in the business. What's more, thanks to a tax treaty with the UK, US investors don't pay foreign withholding tax on Diageo dividends.

With a wide geographical reach extending into 180 global markets, Diageo is another fine way to increase international exposure in your portfolio.

Buy below: $75

We'll keep you posted on any future developments with DEO.

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