Diageo plc (ADR) (DEO)

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.

One sentence: Smirnoff, Guinness, Johnnie Walker, Tanqueray, Cuervo, J&B, Baileys and Captain Morgan. This ADR is sometimes neglected by US-centric investors and represents a buying opportunity. This is a great BRIC (emerging countries) play.

I like Diageo as a defensive play and likely market beater on a total return basis over the next few years. Valutation metrics are in line with its peer group, while the balance sheet is strong enough to support very attractive dividend yield north of 6%. Leadership positions within a wide variety of spirits; also has some "low end" lines, which should continue to do well if drinkers trade down. I hadn't realized until recently that they sell more Guinness in Africa than in Ireland. reports.

Worst case scenario - their 10 year old Johnnie Walter inventory becomes 12 year old and they sell it for more profit - seems like a good business model for these recessionary times

.

Diageo (DEO) is a British company which produces beer, wine, and spirits. Their brands include Guinness, Johnny Walker, Captain Morgan, Gordon's, Tanqueray, Smirnoff, Hennessy, and a variety of particularly fine single malts including Caol Isla, Oban, Talisker, and Lagavulin. At 13 to 14 times trailing earnings, with a fairly consistent revenue stream and a 3.5% dividend yield, it would be an appealing business in any case. The relatively high level of debt is adequately serviced by earnings, while gross margins are in the neighborhood of 60%. But what makes the company so attractive to us at this price is the ability to use US dollars at their current purchasing power to buy future earnings in a variety of world currencies, which increasingly will derive from consumers in emerging markets.

We follow this company on our blog at the Three Dollar Hedge Fund: http://threedollarhedgefund.blogspot.com

World's leading distiller and distributor of wine and spirits. Diageo's broad portfolio includes many of the most popular brands around the globe, including: Crown Royal, Guinness Stout, Johnny Walker, Jose Cuervo, Captain Morgan, and Tanqueray.

Wine and liquor are closing the gap and siphoning market share from beer brewers, and many drinkers are migrating to high-end, premium brands -- playing right into DEO's strength.

With light capital requirements (capex spending only totalled 3% of last year's $16.8b in sales) Diageo generates copious FCF, most of which is returned to shareholders through dividends and share repurchases.

Hard to ignore the company's obvious scale advantages (the firm's annual sales volume is 91 million cases, 15 million more than its next closest rival).

Alcoholic beverage firms can be countercyclical, and are somewhat immune to economic downturns.

Strong international growth prospects.

Increased marketing spending generating better results in the key on-premise (bars, clubs, restaurants, etc.) distribution channel.

This reliable global giant has attractive margins, steady cash flows, and the power to push through price increases on products that benefit from robust (and virtually guaranteed) demand.

Think the world's consumers will suddenly lose their thirst for alcohol? I doubt it.

Yeah, people might want to drink more in this economy, but what I love about DEO is its strong brands. Scotch still accounts for a lion share of their profits, but I see a lot of potential in beer and spirits, particularly with vodka and Guinness. I'm interested to see what the Ketel One deal brings to there bottom line.

And I don't buy the notion that people won't "trade up" for DEO's premium brands. maybe less people will have Johnnie Walker Blue as their after dinner drink, but are people going to ditch Smirnoff and Tanqueray for moonshine? I don't see it. DEO has a solid portfolio with a lot of growth left in it.

The Best International Stock for 2007: Diageo

By Todd Wenning (TMF Phiila)
November 24, 2006

Earlier this month, I argued that American investors are overlooking some great international companies and thus missing out on some great growth opportunities. One of these companies is London-based beverage company Diageo (NYSE: DEO).

Dee-ah-who?
You may not have heard of Diageo before, but you certainly know some of its brands: Smirnoff, Jose Cuervo, Guinness, Tanqueray, Captain Morgan, just to name a few.

So you know some of the brands it manages, but there are myriad other reasons why you should get to know Diageo, including:

* Its 3.8% dividend yield
* Its 32% return on equity
* Its 30% EBIT (earnings before interest and taxes) margin

If these metrics don't compel you to at least do further research, I'm not sure what will.

There are only three other U.S.-listed mega-caps with a dividend yield greater than 3%, 30% ROE, and 30% EBIT margins -- CNOOC (NYSE: CEO), Petroleo Brasileiro (NYSE: PBR), and GlaxoSmithKline (NYSE: GSK) -- and, interestingly enough, all three are foreign companies.

Diageo's largest competitors are Constellation Brands and Fortune Brands (NYSE: FO), but neither company can compete with Diageo in terms of scale, dividends, margins, or ROE.

Second round's on me
Despite such excellent financials and a large competitive advantage, only five Wall Street analysts actively follow Diageo's stock. Some of the big firms like Morgan Stanley (NYSE: MS) and Merrill Lynch (NYSE: MER) keep their eyes on Diageo, but because the stock only trades about 300,000 shares per day on the New York Stock Exchange, there isn't strong investor demand for a large Wall Street following ... yet.

This isn't the case in Motley Fool CAPS, our new community-investing database, where 210 investors have rated Diageo to either "outperform" or "underperform" the S&P 500.

CAPS investors are overwhelmingly bullish on Diageo -- fully 98% of those following the stock rated it outperform. And, if the past offers any prologue, the bulls will win in a landslide. Over the past 10 years, Diageo has returned 15.1% annually versus the S&P 500's 8.6%. To put that in real dollar figures, a $1,000 investment in Diageo in November 1996 would have left you with $4,080 today, while the S&P would have netted you a still-respectable $2,281.

International player
Diageo is a true multinational company with assets and revenue streams diversified across the globe. For instance, the company generated 31% of its fiscal year 2006 revenues in North America, 16% in Great Britain, 25% in Europe, and 28% in the rest of the world. Revenue growth has been particularly strong in the North America and Asia Pacific markets.

If you're interested in learning more about Diageo, read what other investors are saying right now on Motley Fool CAPS. While you're there, I also invite you to rate Diageo outperform or underperform and add your thoughts to the vibrant discussion.

Go here for the complete list of contenders in our CAPS international-stock tournament.

Todd Wenning does not own shares of any company mentioned in this article. Diageo and GlaxoSmithKline are Motley Fool Income Investor picks. The Fool's disclosure policy reminds you that 21 means 21.

I live in Thailand and some of their products are huge here. InThailand most people buy the a bottle on liquor not shots or individual drinks. The bar scene is very different. I also buy their products at bars. Specifically Johnny Walker, Red label and Black label is hugely popular for the middle to upper class. If China is anything like Thailand I expect as time goes on for their brands to be very successful in China. Especially, if the middle class in China grows. In addition, over the years I think the dollar will weaken compared to Chinese currency. Finally, the dividend is also nice.

I have recently acquired shares in this company, after a long wait for a downturn that never seemed to be coming. To me, this seems like a great stock to own regardless of the economic conditions, locally or globally. People almost universally like to drink, whether socially to relieve inhibitions or daily as an escape from their problems (such as a bursting of the sub-prime mortgage market and subsequent decline in home values) . I am especially pleased with the high-end line of spirits they offer, which will appeal to baby-boomers for many years to come. Also, their growth into China looks very promising, as they seem to be taking very well to the high-end Johnnie Walker (34% market share of all whiskey in China) whiskey. With the possible acquisition of Absolut, this will increase Diageo's market share of premium vodka's, complementing the ever-popular Smirnoff label. The one downside I see is their strong leverage with debt, with a debt/equity ratio of 1.34. However, so long as their cash flow remains strong, which is almost a certain guarantee, this debt can be managed. With an accompanying dividend yield of approximately 3%, this stock should see steady growth for many years.

A Motley recommendation, Diageo (DEO) is a participant in the branded beverage alcohol industry and operates on an international scale. The company calls itself the "...world's leading premium drinks business...." Since the Fools dubbed it the "Best International Stock for 2007" on 11-24-06, Diageo has been downgraded from HOLD to BUY. A point of interest: a Santa Clara County, CA news story, dated today, said Diageo is backing an initiative to prevent drunk driving and underage drinking. Another story indicated the company participates in many worthwhile causes in their distribution areas. (A good PR thought on their parts, since they sell liquor, beer and wines!) That aside, lots of people drink -- responsibly or otherwise -- and probably will continue to consume this company's booze well into the future. The brands they make and distribute include: Smirnoff, Johnnie Walker, Guinness, Baileys, J&B, Captain Morgan, Cuervo, Tanqueray, Crown Royal and Beaulieu Vineyard and Sterling Vineyards wines. Any of those sound familiar? Diageo formed in 1997following the merger of Guinness and GrandMet and is headquartered in London. The company is governed by a board of directors who are accountable to shareholders.

Diageo is the owner of Smirnoff vodka, Guinness beer, Tanqueray gin and J&B scotch, among others. As a practicing alcoholic I know these products well.

Diageo has a growing presence in China. As the Chinese move from their traditional agricultural tea sipping society to a more intense capitalistic one they will be drawn to Diageo?s beverages.

Did I mention the 2.9% dividend?

Diageo just seems to be in the right place with the right products at the right time, in a beverage market that's moving away from beer. (Discl: I also own BUD.) DEO's hot brands at the moment include the Smirnoff-ice products, and flavored vodkas, Captain Morgan rum, more brands of Scotch than I can think of, including Johnny Walker, in all the different label colors. The renewed popularity of martinis is good for the Smirnoff vodkas, and also Gilbey's and Gordon's gin.

And while the domestic beer market is also losing share to imports, Diageo owns the Guinness brands, including Harp and Smithwick's.

Slowing economic growth means more people drowning their sorrows. Additionally, those that are employed are enjoying higher wages, allowing them to enjoy the finer brands (Guiness, Smirnoff, etc.). Great upside until the Fed starts cutting rates.

Great business with great brands. Less affected by overall business conditions as people will always by liquor. Poised to earn more in the emerging markets as business and wealth increase without losing much in developed markets.

I like to drink when I am happy, and I like to drink when I am sad. If I lose my job in this economy I am going to buy a bottle of scotch. If I get a raise, I too will buy a bottle of scotch. This is one of the few investments where you can actually contribute to the bottom line by getting drunk! That is a win-win.

I"m qualifying this pick, however - it will outperform if we go into a bear market. But if this bull keeps kicking for another couple of years, then I think this will only match S&P at best.

A ROTH-IRA pic for me in 07
A late addition, I wanted to add an international stock for this investment class but wasn't in love with any new ones. I already own a Chinese Telcom(CHU) and dont like to duplicate within country/sector. Brazil stocks seemed at an all time high too. There it is though in Stock Advisor write up. I then did my own research not only did it meet my international goal but also my goal towards finding a near recession proof company.
P.S. yes I do use a few of their products which always helps.

Has great name recognition with its brands including Captain Morgan, Tangueray, and Johnie Walker among others. Pays a very nice dividend over 4% and with a P/E (ttm) under 20 I beleive it offers a good value. It is also a European company so it offers some diversification by being considered a foreign investment.

This sin stock is going in my real ROTH too. In the next 20 years the world could either get better or spin into deepening chaos... either way, people are going to DRINK... and this conglom is a world leader with a nice dividend. Cheers !