UK - It's happy hour at Diageo: get a round in now
Share tip: It's happy hour at Diego - at Moneyweek.co.uk - the best of the week's international financial media.
Over the past year, drinks giant Diageo has "done little to catch the market's eye", says Paul Durman in The Sunday Times. Shorn of Burger King, the spirits and Guinness group has merely gently underperformed the FTSE 100. But according to Gary Channon, "a would-be Warren Buffett" at Phoenix Asset Management Partners, that's no bad thing: the lack of excitement surrounding the stock means that now is a good time to pick it up as a "long-term bet".
The main tenet of Channon's case is that what Diageo lacks in excitement it more than makes up for with the quality of its brands. Consider drinks as enduring as Smirnoff vodka, Johnnie Walker whisky and Baileys liqueur - all these give Diageo lasting pricing power. The result is an operating margin of 23% and a return on invested capital of 17.6%, according to the latest results, and operating profits of £1.2bn on half-year sales of £5bn. And while growth in developed markets may be modest, there is still scope for brand extensions within them. Look at the success of bottled drink Smirnoff Ice. At the same time, the long-term prospects in Asia and Latin America look solid as both regions benefit from rising populations and increased prosperity.
There are concerns about the drinks group's exposure to the US, says www.MotleyFool.com - the weak dollar could hit profits. But these fears explain why the shares have underperformed so far this year; the weak dollar is in the price.
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Investors should be able to take a degree of further confidence from chief executive Paul Walsh's explicit commitment to shareholder value, says Paul Durman. One result of this has been regular share buybacks. Another is an expectation that Diageo's plans to expand its wine interests will have to pass tough financial scrutiny before getting the go-ahead. At 718p, the shares offer a yield of 3.6%, "with recession-proofing almost thrown in for free". That makes the shares a buy.
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