Diageo(LSE: DGE) (NYSE: DEO.US) is a great long-term investment. The companys portfolio of world leading alcoholic beverage brands is one of the best around and the company would make a great addition to any portfolio, I feel.
However, while Diageo is a great long-term play, in the short term the group could be facing years of stagnation as the group deals with issues at the recently acquired United Spirits, and growth of the global spirits market starts to slow.
Between2007 and 2012, thecompound annual growth rate of total global spirits consumption stood at around 6%. But during 2013, global spirit sales only increased by a marginal 0.1%.
This slowdown was driven by three mains factors, a slowing spirit market in China,a crack-down onalcohol consumption in Russia and increasing competition.
Unfortunately, some forecasts predict that this glacial rate of growth is set to continue for the rest of the decade, which will crimp Diageos growth.
Whats more, increasing competition is putting pressure on Diageos traditional product lines. For example, locally produced spirits and flavoured vodkas are starting to erode the companys share within key markets like the US.
Indeed, figures show thatduring 2012 the global vodka market reportedly managed only 0.3% growth, although premium vodka sales jumped by 7.6%. Over the past decade, flavoured vodka has snapped up market share, from around 7% of the market during 2001 to 21% by 2013, disrupting Diageos traditional Smirnoff Vodka brand.
As part of Diageos strategy to expand into new markets, the company recently acquired a majority share in Indias United Spirits, which is proving to be a trouble child.
Indias spirit market is growing rapidly, at a rate of 15% per annum and Diageo wants a slice. However, Indias alcohol market is tightly controlled and imported spirits face an import tax of 150%.
To gain a foothold in the country, Diageopaid a total of 1.8bn to acquire its 54.8%stake in United andimmediately discovered a toxic$225m loan to Uniteds parent company. This debt has now been written off. In addition, Diageo has been wrestling with Uniteds smaller shareholders, which were preventing United, now Diageossubsidiary, from making and selling its parents products.
Still, this deal is not expected to be earnings accretive to Diageo for some years, as synergies will take time to flow through. For the time being, Untied will be a dead weight for Diageo.
Despite negative headwinds, City analysts currently predict that Diageo will report sales of just under 11bn for the year ending 30 June 2015, up 6% year on year but still far below the 14.6bn in sales reported for 2012. The company is expected to report pre-tax profit for the same period of 3bn, once again, up year on year but down around 1% from the figure reported for 2013.
Further, City analysts expect Diageo to report 5% sales and pre-tax profit growth for 2016. So according to City figures the company is set to grow steadily for the next two years, although Diageos sales are still far below the level reported several years ago.
Nevertheless, Diageos defensive nature and dividend yield of3% are two factors the make the company a great pick for any retirement portfolio.
And that’s why our analysts have selected Diageo as one of the five shares we believe you can retire on.Just like Diageo, all five opportunities offer a mix of robust prospects, illustrious histories and dependable dividends.
Thereport is completely freeand is only available for a limited time. So there’s no time to wait around.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.