Diageo (LSE: DGE) was formed from the merger of Guinness and Grand Metropolitan in 1997. The company has been a remarkable success, and as far as FTSE 100 shares go, you’d fail to find many better performers. In fact, it’s now the seventh-largest firm on the Footsie, with a market cap of £87bn.
It’ll actually be 25 years this month since that merger. An investment over that time would have grown at a compound annual growth rate (CAGR) of just under 8%. Throw in the growing dividends too, and that figure would be much higher.
The name Diageo is composed of the Latin word diēs, meaning “day”, and the Greek word geo-, meaning “world”. Hence the company’s slogan: “Celebrating Life, Every Day, Everywhere“.
An excellent diversified portfolio
Diageo sells its drinks in over 180 countries in all four corners of the world. This extreme global diversification makes it one of the UK’s greatest exporters. Total sales are expected to clock in at over £17bn in 2023.
The company may have been founded in 1997, but its most popular brands go back much further than that. In fact, its top six alcoholic beverages were all founded between 1759 and 1974. This shows the resilience and consumer loyalty these timeless brands possess.
Diageo’s Top Six Brands
| BRAND | ORIGINS |
| Johnnie Walker | Scotland, 1820 |
| Guinness | Ireland, 1759 |
| Smirnoff | Russia, 1860 |
| Baileys | Ireland, 1974 |
| Captain Morgan | Jamaica, 1944 |
| Gordon’s | England, 1769 |
Diageo has also been a serial acquirer of popular new brands over many years. Two successful purchases include super-premium tequila brands Don Julio (in 2015) and Casamigos (in 2017). I expect many more of these tuck-in acquisitions, fueling further growth.
The firm also has a 34% stake in Moët Hennessy, which gives it further exposure to the high-end luxury drinks market.
Price risk
The stock is near its all-time high and currently has a price-to-earnings (P/E) ratio of 26. Like one of its luxury spirits, that’s a bit of a premium price to pay. So the risk here is that I’m overpaying for the stock. Maybe I could wait another six months and get it cheaper.
Maybe. But this won’t be the first time I’ve purchased the stock. And it probably won’t be the last. I see growth opportunities in developing regions and the potential to raise prices in developed markets. I see the shares becoming more valuable.
Recession risk
Of course, the looming global recession could cause a weakening in demand for Diageo’s products. During the last 2008 recession, for example, its US and Europe annual net sales declined 3% and 2%, respectively.
Management highlighted this back in July: “We expect the operating environment to be challenging, with…significant cost inflation, a potential weakening of consumer spending power…We continue to closely monitor consumer trends to enable us to respond quickly”.
Interestingly though, the boss of Moët Hennessy said last month that his firm was “running out of stock on our best champagnes”. This was driven by the wealthy spending big on luxury goods, a continuing trend he referred to as the new “roaring 20s”.
If that’s true, it might also bode well for Diageo’s own ‘super-premium plus’ spirits brands. Either way, I intend to keep my Diageo shares well beyond the 2020s.
