It’s a classic sin stock and already has a market-cap of £82bn. But the Diageo (LSE: DGE) share price has proved to be one of the best investments in the FTSE 100 in recent years.
Diageo shares have doubled over the last four years and tripled since 2010. Along the way, the group has strengthened its grip on the global market for premium spirits. It’s also continued to return generous amounts of cash to shareholders.
History won’t necessarily repeat itself but, in my view, Diageo is likely to remain a great business to own. Indeed, I’m pretty confident it will continue chucking out dividends for the rest of my life, and beyond. Here’s why.
A perfect pairing
Some companies have great products but weak financial performance. Others perform well financially but only have average assets. Only rarely do we find companies with both.
I think Diageo is one such firm. The group’s valuable portfolio of drinks includes global brand names such as Johnnie Walker, Smirnoff, Baileys, Tanqueray and Guinness. Alongside this, Diageo owns upmarket brands such as Talisker (whisky), Casamigos (tequila) and Ketel One (vodka).
This business enjoys annual sales of more than £12bn on which it generates an operating profit margin of more than 30%. As you’d expect, cash generation is very strong. Although some of this is spent on acquisitions and product development, the firm’s accounts show much of it is returned to shareholders.
The group’s dividend has risen by 50% since 2014 and totalled £1.6bn in 2018/19. During the same financial year, Diageo returned a further £2.8bn to shareholders via a share buyback.
Chief executive Ivan Menezes expects profit margins to continue improving as the trend towards premium brands continues. The board has now approved plans for a further £4.5bn return to shareholders over the next three years.
A lifetime guarantee
If Wikipedia can be believed, humans have been drinking fermented beverages for nearly 10,000 years. Certainly evidence of alcoholic drinks goes back for several thousand years. But now a trend to more moderate drinking is being widely reported in the press. Diageo is responding to this and recently acquired a majority shareholding in non-alcoholic spirit firm Seedlip.
However, I don’t think there’s much evidence people are abandoning alcohol. The big trend seems to be “drinking better not more”. Premium brands are a big focus for Diageo and I expect investment in this area to continue.
Will it get too big?
I don’t think shareholders need to worry about Diageo becoming too big to grow. With so many good assets, management would have plenty of options if they decided that more focus or flexibility was required.
For example, one possibility might be to sell Guinness and the group’s other beer brands. Another choice might be to spin out its whisky business into a separate company.
Buy DGE today?
At a last-seen price of 3,452p, Diageo shares are trading on 24.5 times 2019/20 earnings, with a dividend yield of 2.1%. I wouldn’t blame you if you carried on buying at this level, but this is too expensive for me. I see this as a stock to pick up next time the market crashes — and then hold forever.