I reckon Diageo (LSE: DGE) could be one of the best shares to buy within the FTSE 100. Nick Train (sometimes called ‘the UK’s Warren Buffett’) is a big fan of the stock too.
Portfolio of brands
Diageo is a beverage company that has a diversified portfolio of over 200 brands. It owns big names such as Johnnie Walker, Captain Morgan and Smirnoff, among many others
And it has been growing its portfolio by acquiring brands. The global beverage industry has been consolidating, which I think is good for large companies like Diageo. This means that it can use its capital to snap up the smaller players and expand its portfolio. This is one reason why I think Diageo is one of the best shares to buy now.
I think acquisitions will remain part of Diageo’s strategy too. Last year it purchased Hollywood actor Ryan Reynolds’ Aviation American.
Capitalising on trends
Diageo derives a large portion of revenue from emerging markets and I feel this region has huge growth potential.
Whisky, which is a key part of the DGE portfolio, is seen as a status symbol for the growing affluent classes in countries such as China and India. Consumers in these regions are willing to pay more for premium products, especially whisky that has ‘aged’.
Drinkers are also loyal to premium brands, which are a big part of the company’s offer. I think this is important at a time when the beverage market is so competitive.
Diageo is capitalising on the ‘premiumisation’ trend, where it believes consumers will pay for a higher-quality product. While there’s a risk that this trend could run out steam, so far the strategy has worked well for it.
The coronavirus pandemic has had an impact on Diageo’s business though. Lockdowns have resulted in pubs, bars and restaurants closing temporarily especially in the developed markets. This has meant fewer people drinking alcoholic beverages. If the pandemic and restrictions continue, there is a risk of a negative impact on Diageo’s revenue.
Nick Train thinks Diageo is one of the best shares to buy
But as I said, Nick Train, one of the UK’s highest-profile fund managers, likes Diageo. He’s invested in the stock via his Finsbury Growth & Income Trust portfolio.
Train thinks Diageo has the best collection of alcoholic brands in the world. He even goes as far to say that he thinks UK investors are lucky to have such a company listed on the London Stock Exchange. He thinks consumers are loyal to premium brands and that some of Diageo’s brands are still likely to be around in 50 years.
There’s no guarantee Diageo’s brands will be around for a long time, of course. But I agree that this consumer loyalty will boost the company long term. This should help Diageo fend off competition.
I think Diageo makes a good addition to a diversified portfolio like mine. There’s growth potential and its dividend is respectable. It currently yields a little under 3%, comfortably covered by earnings. While there’s no guarantee it will continue, Diageo has managed to increase its dividend during the pandemic.
The shares aren’t cheap, with a P/E ratio of 28x. But as a long-term investor, I think sometimes it’s worth paying for a quality business. For these reasons, I’ll be buying Diageo shares in my portfolio.