Designating a company a ‘buy and hold forever’ stock is not something you should take lightly. Trying to find an investment you can own for the rest of your life is a complicated process, and even if you think you’ve found something, there’s no guarantee it’ll work out the way you think.
Businesses with strong brands are a great place to start looking for the best buy-and-forget companies. If a company owns a strong, well-established brand, as long as management does not ruin the reputation of the brand, it will work out to be a great asset to the firm.
Diageo (LSE: DGE) owns a host of well-known, reputable brands, all of which have an enormous global presence, distribution network, and strong following.
The world’s best brand portfolio?
Johnnie Walker and Smirnoff are just two of the company’s offerings. Both are worth over £1bn each, and both have been around for more than 100 years. Diageo also owns the world-famous Guinness brand, which has some of the most loyal fans in the world.
As long as Diageo does not tarnish the reputation of these brands, they should continue to sell, and in ever greater numbers as the world’s population expands.
Aside from brand power, the company is highly profitable, a result of being able to charge what it likes for its products as customers shop for the name rather than price. For the last financial year, Diageo reported an operating margin of 29.7% and return on equity of 28.8%. For the past six years, these metrics have remained relatively stable.
Too expensive to buy?
So, Diageo’s strong brand portfolio enables it to maintain wide profit margins and produce a high return for investors.
These traits mean that it’s easy to justify paying a high price to get your hands on the company’s shares. At the time of writing, shares in the drinks giant trade at a forward P/E of 21.8, which might seem expensive compared to the wider market, but is in line with the rest of the global beverage sector (20.5).
I believe Diageo deserves a higher valuation than this because the rest of the beverage industry has to make do with a median operating profit margin of 10%. The company’s return on equity of 28.8% is also much higher than the sector average of 8.8%.
Put simply, these numbers show that while shares in Diageo might look expensive, compared to the rest of its sector, the company deserves a premium valuation.
The bottom line
All in all, thanks to its brand portfolio, industry leading profitability metrics, and growth potential, Diageo is the one FTSE 100 stock I’d hold forever. While other companies such as Unilever and Reckitt Beckinser might have similar defensive qualities, their products do not have the same heritage as those of Diageo, and sales are under pressure from local competitors.
