Multinational alcoholic beverage company Diageo (LSE: DGE) is on an amazing run in the market. Its share prices have gone up 23% in the last 2021 and 37.3% in the last 12 months. Is Diageo still a buy at the current price of 3,618p? Here’s why I think the stock will continue to climb over the next few years and why it is a must-have for my long-term portfolio.
Strong financials
After the turbulence of 2020, Diageo has reported excellent sales and revenue growth in its 2021 annual report. Net sales saw organic growth of 16% to £12.7bn and operating profits went up 76% to £3.7bn in 2021 from £2.1bn in 2020.
Earnings per share too went up 89.4% to 113.8p in 2021 from 60p in 2020. The most important value in Diageo’s finances to me is cash in hand, which grew to £3.6bn (2020: £2.3bn).
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The company focuses on acquiring alcohol brands and currently owns over 200 brands in more than 180 countries. The growing cash reserves shows strong buying potential, which bodes well for me as a potential investor.
Diageo has also responded well to the 45% increase in e-commerce alcohol retail sales. Though relatively new to e-commerce sales, the company has expanded online sales 70% over the last year across key regions like the UK, Germany, and China. The launch of alcohol delivery through the ‘boda-boda’ motorcycle delivery app helped counter strict lockdown measures in Kenya and Uganda.
International expansion strategy
Along with its repertoire of famous international alcohol brands like Johnnie Walker and Smirnoff, Diageo is focusing on growing markets like India, Africa, and China. The Asia Pacific market now collectively accounts for over 20% of Diageo’s sales.
The focus outside traditional markets like the UK and US is a great sign. Growing economies like Africa and Asia are large alcohol markets with increasing spending potential. The company has procured many popular local brands and lower price point options such as Smirnoff X1 in Africa, McDowell’s No. 1 in India, and Black & White in Latin America.
Diageo’s Greater China sales showed the highest growth of all regions standing at a 38% increase from 2020. This is very encouraging because China is the largest alcohol market in the world, outstripping the UK, US, and Germany combined.
The company also recognises the push towards greener manufacturing methods. It reduced greenhouse emissions by 5.1% in 2021 and targets net-zero by 2030 in Scope 1 and 2 emissions. As a young investor, I always look at the sustainable practices of a company during my pre-investment research and this is a positive sign which shows me good long-term vision.
Concerns
Alcohol regulations across borders are always tricky and subject to growing taxation. Diageo’s sales could be affected by ever-changing export and import regulations.
Another consumer trend that is concerning for the alcohol industry as a whole is that Millennials drink lesser than previous generations. Surveys show that nearly 35% identify as teetotalers. The growing focus on healthy living could affect global alcohol sales in the years to come.
But, I am still confident that the alcohol industry is going strong, which is why I think Diageo’s steady run in the market could continue over the next five years. It was on my watchlist in July and retains its place as a must-have UK stock for me.
