Warren Buffett’s holding company has acquired 18.5m Diageo (LSE: DGE)(NYSE: DEO) shares in recent months. That means Berkshire Hathaway has doubled its holding in the Guinness brewer’s US-listed stock, becoming its 10th largest shareholder in the process.
Nick Train, manager of Finsbury Growth & Income Trust, which has 11% of its portfolio invested in Diageo, said he was “delighted” to see Berkshire scooping up shares.
At 3,669p, the stock is down 5% over the past year. Should I be increasing my holding at this price?
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Mixed results
In January, Diageo released its interim results for the six months to 31 December. Organic sales grew 9% year on year while operating profit rose 15.2% to £3.2bn.
CEO Sir Ivan Menezes noted: “Today, Diageo is 36% larger than it was prior to Covid-19, reflecting the strength of our diversified footprint and advantaged portfolio”.
One concern in the report was that sales in its key North American market slowed more than analysts expected. While that creates some risk if the slowdown continues into the second half, I do expect US sales to recover once the economy gets back on track.
Management also didn’t seem too concerned as they commenced a new share buyback programme and lifted the interim dividend by 5%.
Diageo has now increased its annual payout for a quarter of a century, making it a dividend aristocrat.
Premiumisation trend
Diageo is almost constantly optimising its portfolio through acquisitions and disposals, with a particular focus on ‘premium-plus’ labels.
For example, in November, it announced the purchase of Balcones Distilling, a Texan craft distiller and one of the leading producers of single malt whisky in the US.
Diageo already owns many high-quality malt distilleries in Scotland, so this acquisition is highly complementary to its existing portfolio. It’s expected to drive further growth in its premium whisky segment.
Furthermore, the company recently said it had reached an agreement to acquire Don Papa, a super-premium rum brand from the Philippines. Meanwhile, it sold the Archers Peach Schnapps brand.
The strategy here is simple but powerful. Premium brands tend to be more profitable than ‘value’ ones, increasing margins and profitability. Yet this segment also offers better protection against inflation, as wealthier drinkers are less likely to trade down their favourite premium brands even when prices increase.
The firm now derives 57% of its sales from premium labels. Yet management thinks we could be in the early innings of a long-term global trend towards premiumisation.
Putting all this together, the future looks very bright for this spirits behemoth.
Will I buy more shares?
Diageo is one of my top holdings. It’s a fantastic company that owns over 200 brands, some of which I consider timeless, such as Johnnie Walker, the world’s best-selling Scotch whisky.
But I reckon the company could have decades of steady growth ahead of it. There seems plenty of opportunity in Asia and Latin America as overall incomes rise in these regions.
As such, the shares have been on my watchlist for some time. There just hasn’t been a share price drop enticing enough for me to add more shares to my portfolio.
At least not yet. But as soon as an opportunity presents itself, I’ll merrily top up my position in Diageo stock.
