Drink up with Diageo

10/01/2002 12:00 am EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue is skeptical about the strength of the global economic recovery and has increased the defensive posture of the model portfolio in his exceptional newsletter, Wall Street Winners. His  latest position is a lesser-known company in the consumer staples group that is “at least three times larger than its nearest competitor, has the best brand portfolio in its industry, has predictable cash flow and it’s yielding 4%.” Here are the details.

“Many investors have never heard of London-based Diageo (DEO NYSE), but the company’s brand names–including Guinness beer, Johnny Walker scotch, Tangueray gin, and Smirnoff vodka–are household names for most consumers. In fact, Diageo owns either the #1 or #2 label in just about every cateogory of alchoholic drink imaginable. And alcoholic drinks are among the least economy-sensitive products around. Statistics also show that alcohol brands command great brand loyalty. With the world economy growing slowly at best, alcoholic drinks are among the safest and most predictable industries.

But the drinks business, despite its stodgy image, is rapidly evolving. The keys to mature markets are branding and distribution, two of Diageo’s strongest suits. No liquor store or bar in the US is going to be without Smirnoff or Johnny Walker featured prominently because both are top brands in their categories. This gives Diageo an enviable distribution channel for new products or acquired brand names. For example, Smirnoff Ice was in front of millions of consumers almost immediately with instant name recognition, and the company doubled volumes sold in about a year.

During the past few years, Diageo has been transformed from an overdiversified food and drinks company into the world’s largest and most focused player in the alcoholic drinks market. The company sold off its Pillsbury unit last year, raising more than $10 billion. Meanwhile, early in 2001, Diageo completed the purchase of Seagram’s drink assets from Vivendi Universal; Diageo is keeping the best brands and selling the remainder to raise more cash. And just a few weeks ago, the company sold off its Burger King restaurants for about $2.3 billion.

Unlike many companies these days, Diageo isn’t simply hoarding the cash to fund dubious acquisitions. Much of these proceeds are being returned to shareholders through massive share repurchase programs totaling $2.6 billion this year and about $1.6 billion next year. Diageo is a buy up to $52.”

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