In a Million Dollar Nutshell ? How to Invest in Diageo Stock ?
Does beer make a good investment? Yeah, it does! The industry doesn’t have an end in sight and Diageo is the steady dividend machine of the industry. If you’re an investor with a relatively low tolerance for loss, Diageo could be a useful choice for you. It’s safe in the long term and has very responsible management. However, if you’re looking for an enterprising stock pick to try and beat the market, try another fishing hole. You won’t see immense growth here and Diageo is a bit pricey, though of course great companies are worth a premium. If you’re looking for an investment you can afford to forget about, Diageo fits the bill. It gives you exposure to an alcohol industry that even in a recession, can stand on its own!
Read on to Learn Everything About Diageo Stock!Disclaimer: I do not own Diageo (DEO) at the time of writing. Disclaimer: chrismorrissey.money does not provide financial advice. All content is purely informational. Consult independent advice.
What if instead of buying another pint, we invested that money in the pint? Think Tanqueray, Smirnoff, Guinness, Bailey’s or over 200 other landmark brands of alcoholic drink – all owned by Diageo . You can go to the London Stock Exchange and buy a share of the business, but is it worth it? Are there profits to drink up and for whom? We’re gonna explore all of it in under 10 minutes. Let’s go!
Brand Portfolio Categories
To be honest, Diageo itself isn’t that important to the consumer . What matters are the stories of 6 ‘Global Giant’ brands, 11 ‘Local Stars’ brands, and 12 ‘Reserve’ brands that have built Diageo into what it is today.
No matter what price point you’re looking for, no matter what category have a taste for, or what country you live in, Diageo can offer you a drink!
3 Businesses In 1
If we become investors and buy the stock, how Diageo makes money becomes how we make money. Selling billions of pounds of alcohol every year , yes, it’s a simple enough product business model. However, we need deeper insights than that. Diageo does not sit on its hands as owners of these brands, in fact, it’s 3 businesses in one.
Once we have a grasp on how well Diageo is at these three value creating activities; making drinks, moving drinks, and marketing drinks, then we have a grasp on whether we want to buy the stock or not.
Consumers Will Never Stop Being Alcoholics ?
If we’re to become owners of this consumer products company, then we ought to know who the consumers are! By gathering clues as to their behaviour, we can predict business in the future. First of all, loyalty to a brand is strongest when that brand has become ingrained in the buyers identity, not just as another drink. Diageo might be a relatively young company but these brands have been around, in some cases, for generations! Consumers will very rarely opt for the cheaper alternative as opposed to buying their traditional drink .
Now, other cultures with religious norms or their own local drinks may never see a Diageo product. However, with spirits deemed as part of a lifestyle and leisure activities around the world, even in a recession we can expect people to continue to afford themselves the luxury of an after work pint. We will return to this point later. The bottom line is, and literally shows, there are long term prospects in alcohol. We could potentially hold an investment in beer for generations .
Retailers Need Diageo More Than Diageo Needs Retailers ?
Pubs and restaurants are the real customers, not you and I. Think on-trade and off trade businesses, supermarkets, retailers and wholesalers .
At Diageo, the brands are so in-demand and mainstream that retailers can’t afford not to stock them . Diageo has the bargaining power because retailers need Diageo more than Diageo needs them. For that reason, Diageo uses the “pull method” as we say in marketing. It advertises to the masses via megaphone, drumming up excitement for these brands so that retailers respond by ordering it in the barrels full from Diageo, expecting bumper sales from their own shoppers thanks to Diageo’s marketing. Shrewd stuff!
Diageo Has Diversified Away Risk ?
Let’s put Diageo and its management under the microscope. Organic sales growth has been healthy throughout the company’s entire history, operating margin growth stable, too. However, there are some interesting details. Usually, one or two brands will face temporary, regional headwinds. The good news is that a few struggling brands every year will only damage a small percentage to your overall takeaway from Diageo’s stock. The bad news is that by the looks of these numbers and these brands, you won’t find explosive growth in Diageo unless it makes acquisitions. The most likely acquisitions in the industry are pot companies.
Brewer’s Droop ?
The best metrics are held internally, which really sucks. However, combine Diageo’s relatively low revenue per employee with statements made in the past about its competitors’ vertical management structures. From those, we can read between the lines and assume this is sadly a very sluggish and slow business . While it may be at disadvantage compared to competitors inefficiency-wise, it’s clearly not holding Diageo back. Every year it achieves a very strong return on equity and return on invested capital . This means the internal returns Diageo is able to make by reinvesting its profit are very high. Earnings that are not reinvested are paid directly to us as shareholders in the form of dividends.
A DuPont analysis reveals the drivers of Diageo’s return on equity. This is really important because if Diageo have a long-term policy of borrowing money to fuel growth as opposed to using equity already in their business, that’s going to hurt in later years when interest payments become due. The equity multiplier is what we use to show us how much debt Diageo is using for this ROE growth, as opposed to equity. We don’t want to see a correlation between this and their increased ROE. Luckily, that’s not what we see. In fact, the leverage ratio supports this. 8% is around industry average and it confirms the idea that ROE is not driven by debt.
As you might expect with a Fortune 100 company, Diageo can pay its short term debts . It has a strong cash position compared to competitors and there are frequent share repurchase programs being announced. That makes any shares you buy today worth much more later on.
Asian Opportunities versus Regulatory Handcuffs ?
Every now and then, Diageo brands make the news. The industry is constantly being pulled left and right, up and down by industry trends. If I had to give you a primer on beverage trends in only 2 minutes, this would be it.
The Rise of Emerging Markets
This is most obvious in Asia and all investors know about it. Asia and Latin America represent huge opportunities, underscored by urbanisation. Growing middle classes also make for exciting Asian prospects.
A Healthy Shift
This is obviously great and more important than business, however, it will negatively affect Diageo. SABMiller have diversified away from alcohol into energy drinks and soft drinks. That’s an effort to capitalise on new markets, something Diageo is only doing with respect to cannabis.
“Dirty Business” Regulation
The US, UK, India, and various other EU countries have national import and excise duties that apply to alcoholic drinks. Alcoholic drinks are subject to taxes ahead of other products, because they’re seen as socially damaging. The regulation around how alcohol is marketed on television and radio is very strict, so how Diageo can advertise online is very important and probably, due for its own regulation.
Private Label Supermarket Competition
Supermarkets are fundamental customers of Diageo. However, they’ve been pushing their own cheaper private label alcoholic brands for years. Diageo has been watching these brands expand and is competing directly against them, but it does have the brand heritage and the quality still on its side, counting for an awful lot.
When it comes to these trends, sorting the minnows from the mammoths is essential. They might all sound major, but Diageo can and will adapt. Any brewer will be vulnerable to many of these factors, so here are the unique characteristics that Diageo can boast as competitive advantages.
Diageo’s Moat ⚔
The most obvious competitive advantage for Diageo is of course the reputation of its brands . Many of Diageo’s brands hold local meanings and drinking is a ritual. The whole point of a brand is to attach some sacred social or imaginative value to an object, and Diageo can serve up some of the best brands in the world at this. Famous brands also help combat the low switching costs of retailers who can easily choose to stock a different drink.
Trade secrets are big, too. New technologies and brewing capabilities will always leapfrog you, but traditional recipes and other trade secrets are advantages for as long as they kept secret.
There’s also the obvious size of Diageo. They’ve got considerable economies of scale and scope, microbreweries therefore facing an unassailable wall of entry costs. Diageo’s size also gives them bargaining power against both buyers and suppliers, which is pretty neat.
Diageo is in a position to serve its markets faster and more efficiently than competitors, as well. By recently revamping its supply chain strategy for select products segments, the company has drastically reduced the risk of disruption to its Asian business.