We’ll start with Diageo (DEO), the London-based premium spirits giant.
Diageo just reported earnings growth of 28% year-over-year, helped along by rising U.S. booze consumption.
Most of the chatter today revolves around improving U.S. sales, but the real story is in emerging markets, where Diageo already gets 40% of its revenues and soon expects to get more than half. Diageo sees “soft spots” in some of its key emerging markets — most notably in Brazil and China — but this is a short-term, cyclical cooling. Diageo’s future lies in the developing world, and the long-term secular trend toward rising consumer incomes is here to stay.
Diageo also is a serial dividend raiser, boosting its dividend every year since 1999 (Note: dividends are paid in British pounds, and the gains can be masked when translated into dollars.) Diageo raised its dividend by 9% this quarter and currently yields 2.6%.
Diageo’s core scotch whisky business has some of the best competitive moats I’ve seen. Scotch isn’t even technically “scotch” until it been aged for three years, and you can’t command premium pricing until it has been aged for at least 12 years … if not 25. Few would-be competitors have the patience or the bankroll to sink large sums of money today into a project that won’t be profitable for a decade or more.
Diageo currently trades for 18 times earnings, making it a little on the pricey side. This is a stock that should trade at a premium to the broader market and one that I expect to outperform the market over time. But you might want drip into this one slowly, or better, wait for a pullback before making any large new purchases.