You would think that liquor stocks would be having a rough time of it. With bar closures and an all-around economic downturn, alcohol sales were expected to take a hit. However, many Americans still found ways to have a drink or two with friends despite the novel coronavirus restrictions.
Phone apps that connect consumers with local liquor stores for home delivery saw a dramatic upsurge in activity after the novel coronavirus pandemic hit in full force back in March. According to market data compiled by Nielsen, alcohol sales outside of bars and restaurants shot up approximately 24% during the pandemic.
Hence, liquor stocks are a safe place to park your capital. It’s one of the more recession-resistant industries. That’s why celebrities from Dwayne “The Rock” Johnson to pop singer Nick Jonas want a piece of the action. The former, in particular, made headlines recently when his Teremana Tequila brand made a record-breaking debut. Johnson’s Teremana Tequila is reportedly on track to sell 300,000 9-liter cases by March 2021.
But hey, I am as much a fan of The Rock as the next guy; I would prefer you to park your capital in companies with more history and solid fundamentals. Also, having healthy dividends and strong yields doesn’t hurt.
So, without further ado, let’s check out three liquor stocks that are a cut above the rest.
Liquor Stocks: Diageo (DEO)
Diageo is the world’s largest international spirits producer with a diverse portfolio of well-known global and local brands. It operates in more than 180 countries and produces at more than 140 sites around the world. Beverage brands include Johnnie Walker, Buchanan’s, Cardhu, Justerini & Brooks, Bell’s, Guinness, Tusker, Harp Lager and Kilkenny.
Whether pre-virus or post-virus, you will seldom find a brand as strong as Diageo. And perhaps you find the one-month return of 4.8% a bit disappointing. But I would prefer you to look at the five-year return of 63.6% to make a good assessment.
This year should be considered an anomaly. Even though sales fell 8.7% in fiscal 2020, revenue is growing at a CAGR of 4.4% over a five year period. Plus, sales are expected to make a comeback in fiscal 2021, with revenue of $16.15 billion expected, representing 5.14% year-over-year growth.
Plus, the North American market shows signs of growth, despite the overall sales decline this year. This is important since the market represents 39.5% of the overall pie. The company is also conscious of investing in emerging markets, which are collectively the biggest revenue source.
Before wrapping up, I would like to point out DEO sports a dividend yield of 2.8% and is trading at a 7.78% discount to its 52-week high of $171.29 per share.
Constellation Brands (STZ)
Constellation is the biggest American beer import company, measured by sales, and has the third-largest market share among major beer suppliers. Constellation’s beer portfolio includes imported brands such as Corona, Modelo Especial, Negra Modelo, Pacífico and American craft beer producer Funky Buddha. Spirits brands include Svedka Vodka, Casa Noble Tequila, High West Whiskey and Nelson’s Green Brier Tennessee Whiskey.
Many people genuinely wondered whether having a brand named Corona will negatively impact sales. However, everything seems under control. Although sales fell 3.6% in the second fiscal quarter, it was better sequentially from a 6% year-over-year drop in fiscal Q2.
Constellation reported adjusted earnings per share of $2.76 per share versus a consensus estimate of $2.51 per share, a positive surprise of 10%. The company is making a habit of outpacing Wall Street analysts’ consensus earnings estimates. In the last 12 quarters, Constellation delivered 11 positive earnings surprises. Hence, it’s not surprising that the year-to-date return for the stock stands at 13.8%.
The annual dividend yield is 1.4%, with a trailing 12-month dividend of $3 per share. At a time when most companies in the world have suspended distributions, I find this heartening. Sure, shares are trading at 98.9% of their 52-week high. But Constellation Brands is one of those rare companies that give you a lot of bang for your buck. Great dividend yield, solid operating performance, and excellent brand profile. Paying a bit more for all this doesn’t seem unreasonable.
At a market cap of $139.2 billion, Anheuser-Busch can claim to be one of the world’s largest companies. Although sales of its flagship beer brands Bud Light and Budweiser are still not back to pre-pandemic numbers, the top line rose 4% year-over-year during Q3, while total sales increased by 1.9%.
BUD’s stock rallied from $35 to more than $70 a pop. After hitting historic lows in March, BUD stock looks fairly valued at this stage but still has a lot of room to grow. It has a 52-week high of $83.54 per share and is trading at 3 times price-to-sales. I believe valuation is reasonable, considering the sheer number of iconic brands under its belt.
The global spread of coronavirus led to lockdown in various cities across the globe. BUD’s Q2 results, where its revenue declined by 18% year-over-year, underlined how Covid-19 could have a nuanced effect on sales. On the one hand, people are drinking more due to stay at home orders. However, Bud Light and Budweiser are brands that you usually enjoy in the company of others.
The closure of restaurants and bars, plus the suspension of sporting events, concerts, and nearly every other form of public entertainment, led to a steep dive in beer sales. But with the rollout of the Covid-19 vaccine, I believe the company will handily beat sales growth estimates of 7.6% next year.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.