If you like the occasional tipple, then you will be quite familiar with Diageo‘s (LSE: DGE) brands. From Smirnoff to Baileys to Johnnie Walker, this company has world-leading drinks brands.
Diageo has been a hugely successful consumer goods company, which has followed the template of companies such as Unilever and Reckitt Benckiser.
Building world-leading brands
The strategy has been to invest strongly in innovation, creativity and marketing to maximise brand value until these brands achieve market leadership. Once it has built brands that are the envy of the drinks industry, it takes these brands across both developed and emerging markets. So what was once a regional drinks company is now a global giant.
Ever since the tech crunch at the turn of the century, consumer-goods companies seem to have found a growth sweet spot, which has led to ballooning profits, and share price rises which were initially tentative, but which have gradually gathered pace. This has led to a tripling of the share price over the past decade.
However, momentum has pushed Diageo’s share price to what I think is quite a full valuation. The 2014 P/E ratio is 18.1, falling to 16.8 in 2015, with a dividend yield of 3%.
But emerging markets have hit a soft patch
Perhaps not surprisingly, for a company which has built its burgeoning reputation on emerging markets, when the emerging markets have hit a soft patch, as is happening now, Diageo’s profits and share price have taken a knock.
Diageo has mentioned political instability in Thailand, as well as a crackdown on gift giving in China, but I think the broad brush picture is that the business is experiencing some growing pains in emerging markets.
Nonetheless, I still think that Diageo has a bright future, and I expect further, though perhaps slower, growth across emerging and frontier markets. Over the next few months, I expect the share price to just treading water.
However, looking further ahead, I think that Diageo still has strong prospects. I suspect there is still a lot more growth potential in emerging markets, and that this will continue to drive the company’s growth over the next decade.
Having grown so much already, I wouldn’t expect the share price to surge rapidly higher. But this may be a company to tuck away in your portfolio, steadily generating dividend cheques, with the share price gradually pushing upwards.