I recently opened a position in one of my favorite companies, Diageo (NYSE:DEO) at a price of roughly $112. Most Americans have probably never heard of Diageo, but they (along with Brown-Forman and Pernod Ricard) control the bulk of the major liquor brands that we regularly purchase.
Diageo owns Smirnoff and Johnnie Walker, the world’s best selling vodka and whiskey. They also control dozens of other popular spirits, including the popular Crown Royal, Captain Morgan, Ketel One, Seagrams, Don Julio, Tanqeray and many other household brands. In the beer category they own Guinness, Smithwicks, Red Stripe, Harps and others. Diageo also owns 34% of Moet Hennessy, another major liquor company which owns a variety of brands.
This is as close to the perfect business as exists. They own distilleries and breweries around the world, a distribution network that would be almost impossible to replicate, and brand recognition and loyalty across virtually every available liquor segment. Capital investments are minimal. The margins are solid and predictable, the business model is simple, and there aren’t any startups in a garage with the potential to destroy the company. If the stock market shut down tomorrow for a decade, Diageo is in a rare category of businesses I would not worry in the slightest about holding the shares for the next decade.
Diageo is one of these stocks that’s never as cheap as you like. It almost perpetually trades above the range that allows a value investor to pull the trigger. However, during the runup of the past year, the stock is off 15%, giving a rare buying opportunity. It still trades at 18x which is rich, but this is about as low as the stock ever goes, excluding the 08′ financial crisis.
The company is currently yielding a very respectable 3% with a reasonable payout ratio in the 50’s, leaving it plenty of room to grow. Diageo’s EPS is 5.97. Gross profit margin was 60.70% with an operating profit margin of 30.30%. The Company has incredibly efficient operations with an ROE of 68.90% and an ROA of 19.70%.
I am a drinker, but ironically none of these brands make my regular purchases. I’m a bit more of a small batch, artisanal or local drinker. Most of my whiskey is from Rocktown Distillary in Arkansas and my vodka from Tito’s in Austin. My beer tends to be craft brewers. However it makes me quite happy to imagine every night as people have parties, weddings, reunions, nights with the boys and bachelorette parties that a small part of those purchases flow in to my accounts.
Another factor to keep in mind is that Diageo is based in the UK. It’s home country plus it’s wide global distribution adds a significant amount of international diversification to any portfolio. The company is ideally suited to dividend investors using tax advantaged accounts such as IRA’s because the US tax treaty with the UK allows dividends to flow to the US without tax being taken out (unlike my Swiss favorite Nestle). Even though they aren’t on a US exchange, they are easily purchased through the ADR on the NYSE.
Diageo is certainly worthy of a place in my Permanent Portfolio. I’ve opened a pretty strong position and will continue to add, hopefully after further declines.
Further information on Diageo can be found here.