3 Things to Loathe About Diageo


LONDON -- There are things to love and loathe about most companies. Today, I'm going to tell you about three things to loathe about Diageo .

Name of the game
Almost all the big companies at the top of the FTSE 100 are named after the founding family, the industry the firm operates in, or its geographical origins. Think of Unilever (amalgamation of soapmaker Lever Brothers and margarine producer Margarine Unie), HSBC (Hong Kong and Shanghai Banking Corporation), and British American Tobacco (no guesses what industry this company's in).

I have a theory that it's more than coincidence that Britain's most successful companies have no-nonsense, does-what-it-says-on-the-tin names.

When Guinness (founded by Arthur Guinness) and Grand Metropolitan (previously Grand Metropolitan Hotels) merged in 1997 there was plenty of scope for maintaining a name with relevance and resonance. But no, the merged company brought in a "brand consultancy" that came up with "Diageo" -- from the Latin dies, for "day," and the Greek root geo, for "world." You see, the company would be giving "everyday pleasure everywhere."

An exception to the rule
My foreboding about Diageo was misplaced. The pretentiously named company has proven to be an exception to the rule, growing spectacularly to become the world's leading premium-drinks business. Diageo is now the eighth-largest company of the FTSE 100, with a market capitalization of more than £50 billion.

Shareholders have seen an annualized return of 14% over the last 10 years, and the return has been accelerating -- to 18% over the last five years and 27% over the last three. However, the architect of Diageo's success, chief executive Paul Walsh, has recently announced his retirement, and he will be a hard act to follow.

Stuff and nonsense
There was a hoo-hah last year at the annual awards of the British Institute of Innkeeping (Scotland), an event sponsored by Diageo. The independent panel of judges ordained a little craft-beer company called BrewDog an award-winner. Just before the award was handed over, a representative of Diageo threatened to withdraw the company's sponsorship if BrewDog -- a critic of the "generic, lowest common denominator" products of big drinks groups -- was declared the winner. The award was switched to another company.

When the shenanigans got out, Diageo was obliged to issue a statement to "apologise unreservedly" for this "serious misjudgement" and to express its "regret for this unfortunate incident."

Now, I know craft beers and artisan spirits are de rigueur (or "le must," as the French seem to say these days!), but surely the consumers of these products are such a rarefied bunch that the likes of BrewDog pose no threat to a £50 billion global titan. Hasn't Diageo got more important things to do than shoot itself in the foot by pulling a petty dirty-tricks number?

A poor investment?
Diageo has overcome the handicap of a silly, made-up name; the replacement for super-CEO Walsh has been groomed for the role in the same manner as Walsh himself was; and BrewDog-gate soon blew over. I have to say, it's hard to find much of substance for investors to loathe about Diageo. Long-term holders of the shares have certainly been handsomely rewarded.

So is Diageo actually a good investment? Unfortunately, trading at more than £20, the stock is on a high forward price-to-earnings ratio of 18 and a below-market-average dividend yield of 2.5%. On this rating, Diageo doesn't strike me as the most compelling offer in the market today.

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G. A. Chester has no position in any stocks mentioned. The Motley Fool recommends Diageo and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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