Another round, please! That could easily be the pub refrain of fans of the dark brew. But it also summarises the recent acquisition of shares in Guinness brewer Diageo (LSE: DGE) by legendary investor Warren Buffett.
The ‘Sage of Omaha’ bought shares in Guinness (the predecessor company to Diageo) before cashing out in the early 1990s. Now, over three decades later, it has been revealed his company Berkshire Hathaway (through a subsidiary) owns Diageo shares once more.
Ought I to buy some for my portfolio?
Classic Buffett stock
I am not surprised that Buffett is once more invested in Diageo.
I reckon it has many of the hallmarks of a classic Buffett business. He likes strong brands that give a company pricing power. From Smirnoff to Johnnie Walker, I think Diageo has such brands by the bucketloads.
The reason this matters is that customers develop brand loyalty. As they cannot find a direct substitute for their favourite branded tipple, that allows a manufacturer such as Diageo to increase its price without necessarily losing sales.
Diageo also benefits from strong customer demand. The global market for alcoholic beverages is huge. Diageo alone made sales of £22bn last year.
One risk though, is that among younger consumers, alcohol is increasingly unfashionable. That could lead to falling revenues and profits in future. Diageo is responding to that with alcohol-free versions of classics like Guinness alongside its newer non-alcoholic brands such as Seedlip.
Valuing Diageo shares
So far, so good. Diageo looks like a classic Buffett business, just as it did when he bought into it first time around.
Buffett emphasises that the key to his investment track record has been buying into great businesses at attractive valuations.
I think Diageo is a great business and would be happy to own its shares in my portfolio. But what about the valuation?
Currently, the global drinks giant trades on a price-to-earnings ratio of around 23.
I do not see that as a bargain. In fact, I do not even see it as cheap.
In the long term I have high hopes for Diageo. Buffett has explained that a great business can merit paying a bit more than it is worth (his example is Berkshire’s purchase of See’s Candies). However, valuation still matters. After all, in the long run, my return on any given share purchase depends on what I pay for it.
Waiting for a better price
That is why, for now, I have no plans to buy Diageo for my portfolio.
For now, I continue to see Diageo shares as pricey. I like the company and would be happy to buy its shares at the right price. But they have not reached a price yet at which I am ready to buy.
