January can be a quiet month for the alcoholic drinks trade, as some consumers start the year with plans to reduce their boozing after the festive season. However, as a long-term investor, I look beyond immediate sales trends when considering whether to add shares to my portfolio.
Take drinks maker Diageo (LSE: DGE) as an example. I can see quite a few reasons to consider adding its shares to my portfolio. Here are five of them – along with my rationale for not buying just yet.
1. Strong customer demand
Mankind has been drinking alcoholic beverages for thousands of years and I do not see that trend stopping any time soon. The market for the sorts of spirits and beers Diageo produces is huge. It is likely to stay that way for the foreseeable future.
One risk to sales is fewer younger people drinking than in previous generations. But Diageo has been investing in non-alcoholic beverages like Seedlip, a move that could help it benefit from that trend rather than just being hurt by it.
2. Iconic brands
The company owns a selection of famous brands, from celebrated stout Guinness to Johnnie Walker whisky.
That helps give it pricing power. The brands build customer loyalty which in turn means the firm can charge a premium price for its products.
3. Global reach
Although Diageo is based in the UK, its reach is truly global. The business sells its products in more than 180 countries.
It has a strong position in the key US market and has been building scale in developing markets including India and China.
However, such a complicated distribution network can add costs to a business, hurting profitability. But I see it as a strength overall. Diversification means that although a downturn in one key market like the US could hurt Diageo’s sales, the wide reach could limit the impact of any such problem on overall revenues.
4. Attractive dividend
Diageo is a dividend aristocrat, having raised its shareholder payout annually for over three decades.
That does not mean it will necessarily keep doing so in future. But I am optimistic, as the company generates substantial cash flows and the dividend was covered around twice over by earnings last year.
5. Simple business model
While the firm has built a successful business, the simplicity of its commercial model appeals to me. It reduces the financial risks of poor execution.
Diageo makes, markets, and sells beverages. There is a large existing market demand and the firm’s brands are popular. That is no accident, but rather it reflects decades of hard work.
However, the result is that Diageo has a simple business model. That makes it fairly easy for the company to execute – and easy for me as an investor to understand.
Should I buy the shares?
Overall then, I see Diageo as a great company that has attractive long-term prospects.
As an investor though, I follow the approach of billionaire investor Warren Buffett in trying to buy into great companies that trade at an attractive price. At the moment, Diageo shares trade on a price-to-earnings ratio of 24.
I do not see that as a very attractive price despite the company’s strengths. For that reason, I have no plans to add Diageo to my portfolio at the moment.
