The weekend marked the coronation of King Charles III. And apparently three in four British drinkers intended to celebrate the occasion at a pub, where today Guinness is the most popular pint served. This is just one reason why I love Diageo (LSE: DGE) stock.
Powerful brands
I’d be surprised if I’d entered any UK pub or bar at the weekend (or most days for that matter) and found nobody drinking one of Diageo’s brands. The company’s world-class drinks portfolio, which also includes Baileys, Smirnoff and Tanqueray, seems to have something for every drinker.
In fact, the firm owns over 200 brands, with sales in more than 180 countries. And it’s constantly optimising this drinks portfolio by acquiring fast-growing brands while disposing of others.
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For example, a few months ago it reached an agreement to buy Don Papa, a super-premium rum from the Philippines, while it sold the Archers label. Some of its established best-selling brands, such as Johnnie Walker, are centuries-old yet continue to gain in popularity.
I think the diversity of its portfolio makes Diageo one of the best-positioned consumer staples businesses in the world today.
Premiumisation
The company is benefiting from the ongoing trend of global alcohol premiumisation. This is where brands become more desirable through being associated with superior quality. These higher-end drinks are typically more expensive, resulting in better margins and profits.
This trend is being driven by increasing disposable income around the globe, as well as a growing interest in craft and artisanal products. Diageo owns various labels, such as Don Julio tequila, that cater to this growing taste for super-premium brands.
In its latest interim results, the company reported that its higher-end segment contributed 57% of overall revenue and drove 65% of organic net sales growth.
This strategic focus on super-premium drinks should continue to pay off. Affluent consumers are more likely to be able to weather economic downturns while continuing to spend on luxury goods. This makes them an attractive target market.
Key market headwinds
Today, Diageo has a market-leading position in North America. In fact, over a third of its sales come from this region.
Long term, this is a great market in which to have a strong foothold. But in the near term, there are concerns about a slowdown, as sales here rose 3% on an organic basis in the six months to the end of December. This missed analysts’ estimates.
I think the stock’s valuation could come under pressure if sales remain sluggish in this key market. That’s especially so as it trades at 23 times earnings, which is well above the market average.
As a business, Diageo is 36% larger than it was prior to the pandemic. It’s using this increasing size to reward shareholders by raising dividends and buying back shares. I see that trend continuing.
Finally, it has fast-growing businesses in India and China, where overall disposable income should continue growing for decades. I think the growth opportunities in these two countries for premium drinks could prove to be extremely large over time.
So I see many reasons to love Diageo stock. And if I didn’t already own it, I’d add it to my portfolio today.
