Diageo Plc’s 2 Greatest Strengths

Two standout factors supporting an investment in Diageo plc (LON:DGE).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

diageo

When I think of alcoholic beverage producer Diageo (LSE: DGE) (NYSE: DEO.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company  attractive as an investment proposition.

1) Emerging-market sales

Despite Diageo’s £47,600 million market capitalisation, the firm has great potential to expand further into population-dense areas as their economies emerge and mature. The firm already derives about 42% of its operating profit from Africa, Eastern Europe, Turkey, Latin America, the Caribbean and the Asia Pacific, making such emerging markets important to the company.

The brisk pace of gathering affluence in up-and-coming areas has been driving some perky looking growth numbers. For example, a recent management update reported double-digit sales growth in Latin America and the Caribbean. When we think of raw statistics for population numbers in such areas, it’s easy to imagine the latent growth potential still remaining for Diageo as it distributes its well-known drinks brands. As the firm gains further traction in emerging markets, well-established business in Western Europe and the US becomes less influential on the firm’s overall trading results. With Western Europe recently delivering just 17% of Diageo’s operating profit and North America 41% it doesn’t seem like being long before emerging markets will account for more than half of the firm’s business, making Diageo a cracking emerging market play going forward.

2) Consumable products

There’s nothing better than being big in emerging markets than being big in emerging markets, with consumable brands. Diageo owns some of the world’s best-known brands across the spirits, beers and wines spectrum. However, the firm classifies some of its brands as ‘strategic’ because they are names that it has identified as primary growth drivers across all markets and, as such, they are the main focus for the firm.

The directors reckon these super brands have broad consumer appeal across geographies and are capable of meeting new and emerging consumer trends. Diageo’s strategy is to invest in these super brands on a global basis with consistent marketing from country to country.

Any investment in Diageo is therefore an investment backing the firm’s well-known and often-loved super brands, so I think it’s worth listing them: Johnnie Walker, Crown Royal, J&B, Buchanan’s, Windsor, Bushmills, Smirnoff, Ketel One Vodka, Ciroc, Captain Morgan, Baileys, Tanqueray and Guinness.

I reckon it’s a safe bet that most have heard at least some of these famous names, so now you know what you’re getting into with Diageo. As with all consumable products, people buy them, use them and buy them again. With alcoholic beverages, there’s the added attraction of the products addictive qualities to help bolster the steady cash flow generated from sales.

What now?

Diageo’s emerging-market presence combines with its consumer-product credentials to create an attractive business model.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Kevin does not own any Diageo shares.

More on Investing Articles

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »