Too many people tell me I hate Christmas. All those family feuds, last minute shopping sprees, and car journeys in drizzly, dark, winter days. And then theres Christmas jumpers. Oh, and brussels sprouts.
But I actually like Christmas. After all, you can never listen to Fairytale of New York too many times. Its a great time to havea break from work andcosy up to the family on those cold December nights. And, to me, any excuse for a party and a drink is a good excuse.
Diageo: the gift of Christmas
From pagan festivals through to the modern, commercialised celebrations of today, late December hasalways beenthe right occasionfor a booze-up. Which means that companies like Diageo plc (LSE: DGE) are set to rake in the cash at this time of year.
Diageos strengths are in beer and spirits like whisky andvodka, with brands includingGuinness, Tanqueray and Smirnoff. And while many companies have suffered since the turn of the century, this firms shares have been on the up. In fact, it has been one of the best FTSE 100 investments of the past 15 years.
But wait the momentum that drove the shares up a decade ago seems to have slowed. Since early 2013 the share price has been treading water and hasnt been able to sustain a break above 2000p. Why is that?
While Diageo is a leading player in alcoholic beverages in Europe and North America, you could argue that its brands have pretty much reached saturation point in these markets. The rapid growth in earnings and share price has thus levelled off, even though itsone of a decreasing number of FTSE 100 companies that has robustly healthy balance sheetyear in and year out.
Diageo still churns out fatprofits year after year and that makes itone of the FTSE 100s most consistent performers. This is a highly cash generative business thatcan be relied to producea tidy dividend. And the current P/E ratio of 19.45, and income of 2.83% seems, if not cheap, at least fairly valued.
The question people will ask is where Diageos next spurt of growth is going to come from. And the obvious answer is emerging markets. Sales of spirits in countries such as China, India andVietnam arecurrently very low, and the growing middle classes are expected to go on a spending spree, even withgovernment clampdowns on conspicuous consumption in the key China market. Branded consumer products such as those sold by Diageo are likely to do well.
Thats why I think itremains a good long-term buy. The flagship brandsitsell wills be popular with the same middle class consumers that buy into other well-knownwesternbrandssuch as iPhone, Burberry and Persil.
Its been difficult to find companies in thestock marketthat are still strongly profitable, and also have the promise of growth into the future. I think Diageo ticks both those boxes and should beone consistent performerto tuck away in your portfolio.
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Prabhat Sakya does not own shares in any of the companies mentioned in this article.