I’ve owned Diageo (LSE: DGE) shares for years. And I plan to hold them for a very, very long time.
Diageo is a stock I was drawn to because of the immense brand power of its drinks. Labels like Smirnoff vodka, Johnnie Walker whisky and Guinness stout have enormous fan bases around the globe.
Having strong brand recognition allows a company to raise prices without having to endure sharp volume declines.
The drinks giant must spend colossal sums in marketing to maintain their immense popularity. And this can take a big bite out of earnings. But it’s a recipe that enables it to grow sales ahead of the market.
For example, during the year to June 2022, Diageo either grew or maintained its off-trade market share in more than 85% of its total net sales value in measured markets.
These market share gains drove group sales 24.1% higher in the period. An ongoing recovery in the on-trade (i.e. leisure) sector also supercharged revenues.
A passive income hero
The immense popularity of its brands has made Diageo a particularly great buy for passive income. The dependable long-term earnings growth they provide has given the company the means (and the confidence) to consistently raise dividends. Indeed, the yearly dividend payment has risen 61% over the past decade alone, culminating in financial 2022’s reward of 76.18p per share.
City analysts are predicting that Diageo’s earnings will rise an extra 12% in this financial year too. So unsurprisingly they’re expecting another healthy hike in the annual dividend, to 81.69p
This would represent a year on year increase above 7%. And with the projected dividend covered 2.1 times by earnings, there’s a great chance Diageo will meet broker forecasts too.
A growth stock
Diageo’s ability to deliver reliable passive income means it has a lot in common with popular non-cyclical shares like utilities companies, telecoms suppliers and defence contractors.
But unlike those defensive stocks, Diageo is an exciting growth stock to buy as well as a dividend star. It has set a medium-term target to grow organic net sales between 5% and 7% a year, and organic operating profit between 6% and 9%.
And it’s putting its colossal balance sheet to work to meet these goals.
It’s a keeper!
| Diageo’s share price | £38.50 |
| Price movement in 2022 | -5% |
| Market cap | £88bn |
| Forward price-to-earnings (P/E) ratio | 22.5 times |
| Forward dividend yield | 2.1% |
| Dividend cover | 2.1 times |
Take its strategy to address soaring demand for premium drinks. It’s spent a fortune to innovate popular labels and introduce winning drinks like its high-price Johnnie Walker Black Label. Meanwhile targeted acquisitions have seen it swallow up premium brands like Aviation American Gin in 2020 and 21Seeds tequila earlier this year.
It’s a programme that’s paying off handsomely. Sales from the company’s super-premium-plus portfolio, for instance, soared 31% in financial 2022.
Past performance is no guarantee of future success. But I think I can be confident that Diageo will remain an impressive growth and dividend stock for years to come. I plan to hold my shares for decades.