A Strong Spirit Stock

A Strong Spirit Stock

Diageo owns some of the most recognizable liquor brands in the spirits industry today, including Johnnie Walker, Smirnoff, and Ketel One. But with slowing growth in emerging markets, how is this company keeping growth positive, and is it a good investment for your long-term portfolio?

A solid strategy
In its most recent quarter, Diageo experienced a 5% increase in net sales driven by the growth of strategic brands like Captain Morgan and Johnnie Walker, the company's No. 1 brand. Strategic brands, the company's primary growth drivers, are available across the globe.

This increase in sales was thanks to a combined increase in volume and pricing across all of its products. Volume growth was strongest in emerging markets and North America, which increased 6% and 3%, respectively. The fact that Diageo increased prices and still had volume growth shows the consumer loyalty for the company's brands.

The company hopes to continue growth in North America through the marketing of its strategic brands. Diageo looks at its marketing as one of its competitive advantages, and with memorable Captain Morgan, Ketel One, and Johnnie Walker commercials, I'd agree. Great marketing campaigns allow consumers to feel an attachment to products they might have never tried. Diageo views it as the key to brand strength, which is why the company increased its marketing 10% during 2013. This helped in the launch of a Baileys campaign that was ranked in the top 1% of effective ads for the year.

In addition to marketing, innovation is a huge driver of growth in North America. It allows for continued growth in existing brands, and Diageo has seen success from products such as Crown Royal Maple and Ciroc Peach.

It's not all good news for the company's innovation. In 2013, Diageo's beer-section volumes decreased 1%. The company's CEO, Ivan Menezes, admits that, "Innovation in beer in the last 12 months has not been as successful as we'd like. We need to crack the code in beer." If the company can turn its beer business around, then it could hopefully acquire customers who used to drink premium light beers.

According to Alcoholic Beverage DemandTracker, beer drinkers are moving away from premium light beers to either higher-quality beers or other wines and spirits. This is good news for Diageo as the company continues to work on producing higher-quality beer, wine, and liquor.

Keeping the image
Diageo believes it's important to build the trust of stakeholders and has done so in three ways. First, the company is conscious of the role of alcohol in the global community. It supports more than 300 responsible-drinking programs in 40 countries.

Second, the company monitors its environmental impact by observing its emissions and water waste. During the 2013 fiscal year, Diageo was able to reduce carbon emissions and improve water efficiency. In addition to being good environmentally, reducing water waste will help the company as water becomes scarcer in the future. (For more information on the importance of water, check out this great Foolish video.)

Lastly, Diageo is ingraining itself in the economic development of global communities. The company has projects that train people in bartending, tourism, retailing, hospitality, and entrepreneurship, which helps them find future employment. The company is also training bar staff to work in hospitality rooms at the 2016 Olympics in Brazil.

While these initiatives might not be as lucrative as a new type of Captain Morgan, it's good to know that the company I'm investing in is aware of its position in the world and is acting to minimize any negative impact.

Diageo faces competition from other alcoholic-beverage manufacturers such as Beam , and Constellation Brands .

Beam focuses on distilled spirits that include tequila, Scotch whiskey, and bourbon whiskey. Bourbon is the main driver behind Beam's business with its most recognizable brands, Jim Beam and Maker's Mark, falling under this category. Growing US bourbon sales helped offset slow growth in emerging markets and softness in the U.S. ready-to-serve segment. While Beam has a strong position in the bourbon market, it doesn't have as wide a variety of alcohol as Diageo.

Constellation Brands makes beer, wine, and assorted spirits with recognizable brands such as Corona Extra, Blackstone, and Svedka vodka. The company makes more wine than Beam and Diageo which exposes the company more to the risk of fluctuating grape costs. Higher grape costs contributed to a $5 million decrease in operating income and a 1.3% decrease in gross margin during Constellation's most recent quarter.

Diageo has a higher gross margin than these two competitors at 61%, with Beam close behind at 59%, and Constellation at a distant 40%. Diageo also has higher profit and operating margins of 22.7% and 30%, respectively, over Beam's 15.3% and 26.7%, and Constellation's 13% and 19.7. These margins show that Diageo is retaining more of every dollar of sales and is operating efficiently.

Diageo is also ahead of its competitors when it comes to dividends. The company has a trailing dividend yield of 2.3%, which translates to $2.91 per share. This represents a 9% growth rate for the past year. This is larger than Beam's trailing dividend yield of 1.4%. Constellation has no current dividend.

Diageo also the cheapest of the three stocks with a lower forward P/E ratio of 16.35 compared to Beam and Constellation's P/E ratios of 23.16 and 16.89 respectively. Overall, I think that Diageo has stronger, more diversified brands than these two competitors, and would be a better long-term investment.

Diageo has several popular brands, a strong presence in emerging markets, and offers a quality dividend. With its focus on innovation and strong marketing, I expect steady growth from the company in the coming years. I'd call it a buy for long-term investors.

No Pitch

The article A Strong Spirit Stock originally appeared on Fool.com.

Fool contributor Ben Popkin has no position in any stocks mentioned. The Motley Fool recommends Beam and Diageo. 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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