Diageo p.l.c.: The top Irish and global spirits giant

written on March 16, 2021

Any trip to a bar or pub and chances are that you have sipped on Irish favourites like Baileys, Guiness, Smithwick’s and others, all of which form part of Diageo’s beverages portfolio. With a rich heritage and origins tracing back to a few distilleries in Ireland, Scottland and beyond, Diageo is one of the largest spirits companies in the world, owning and managing some of the most iconic brands ranging from Johnnie Walker and Smirnoff to Tanqueray and Captain Morgan to name a few.

Over the past 20 years the company’s share price has increased by 340% and while the COVID-19 pandemic has had its impact on both the company and industry as a whole, Diageo has soldiered on, delivering its strategic priorities through a business model that leverages global and local expertise and has its consumers at heart. With a market cap as of March 15, 2021 standing at $98.1 billion, without a doubt, Diageo knowns how to make a brand a household name.

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A brief history of Diageo

Diageo was formed in 1997 from the merger of Guiness Brewery, founded in 1795 in Dublin by Arthur Guinness and Grand Metropolitan, a leisure, manufacturing and property conglomerate, headquartered in England. Despite being a relatively young company, its brands have a strong legacy. For instance, in 1795 Arthur Guiness signed the lease on the now world-famous St James’ Gate Brewery which went on to become a legendary brand across the globe, while many of its distilleries were fired-up in the late 18th century. Throughout the next two centuries, its range of brands continued to innovate and expand under various parent companies until the current company was eventually established.

Right from the onset, Diageo began its quest for well-known brands through a series of acquisitions. Some of the most noteworthy ones include its joint venture with tequila brand Jose Cuervo to buy Don Julio Tequila in 2003 and its acquisition of Ypioca, the largest-selling brand of premium cachaca in Brazil for £300 million. In addition, it has purchased a 53.4% stake in the Indian spirits company United Spirits for £1.28 billion, while five years later, the Casamigos tequila brand, a super-premium U.S.-based tequila launched in 2013, became one more addition.

Boasting a rich whisky heritage, Diageo has essentially become whisky royalty, operating 28 malt distilleries, which makes up nearly one-third of the industry’s total capacity, while staying true to its roots, it still maintains a number of facilities throughout Ireland, producing brands such as Guinness at St. James’s Gate Brewery and Baileys in Dublin and Belfast.

Between 2000 and 2002, the company opted to drop its food interests - Pilsbury and Burger King - in order to focus exclusively on its premium beverage alcohol. At the same time, with the need to branch out beyond alcoholic beverages, Diageo bought the majority stake in Seedlip, a non-alcoholic spirits brand.

Today, the company is headquartered in Park Royal, London, on the site of a former Guinness brewery which closed in 2004 after producing beer since 1936. Becoming a true conglomerate with offices in some 80 countries, Diageo is active in around 180 countries across North America, Europe, Asia Pacific, Africa, Latin America and the Caribbean. Every year, 50 million gallons of Irish milk goes into the manufacturing of Baileys Original Irish Cream, while its production of beers makes Diageo the single biggest user of malted barley in Ireland.

Fun fact

Looking to craft a name as iconic as its brands, the company, together with the help of branding consultancy Wolff Olins came up with the moniker Diageo. Composed of the Latin word dies which means day and the Greek root geo- which means world, the name was meant to highlight the company’s slogan ‘Celebrating Life, Every Day, Everywhere’ and to convey the message that its brands are enjoyed by millions of people across the world.

When did Diageo go public?

The Guinness Brewery itself went public on the London Stock Exchange (LSE) in 1886, at a time when it was riding high and was crowned the largest brewery in the world, producing about 1.2 million barrels of beer per year. Over a century later, the newly-formed Diageo went public in December 1997. With a turnover of £8.89 billion in 2004, in less than a decade since its IPO, Diageo was the 11th largest publicly traded company in the UK by market cap. A constituent of the FTSE 100 index, the company has a primary listing on the LSE and a secondary listing on the New York Stock Exchange (NYSE).

Diageo is also known for having consistently paid a dividend since 1998 and for having made increases to it each year for the past 20 years. For instance, in 2009, dividend payment was that of £0.35. Almost ten years later, in 2018, the dividend was £0.65. That’s a compound annual growth rate (CAGR) of approximately 6.4% a year. More recently, its interim dividend increased 2% to £27.96p per share despite the COVID-19 pandemic.

Wondering how has Diageo managed to have steady dividend increases? For one, the company has pricing power which means that it can often increase its prices at the rate of inflation and at times faster thanks to its wide range of leading brands. In addition, these price increases, together with an increased penetration in emerging markets, have powered a general trend of higher earnings over time with just a few and occasional exceptions.

Is Diageo a buy?

Undoubtedly, consumer-discretionary stocks in the food and beverage industry have been hit hard by the COVID-19 pandemic, particularly the closure of bars and restaurants. According to the group’s results for the half-year ended 31 December 2020, sales fell 4.5% to £6.9 billion, while operating profit also declined 8.3%. At the same time, it’s share price has fallen 5% over the past 12 months.

Yet, it hasn’t been all doom and gloom. Despite the dip, Diageo shares have proven to be resilient, outperforming the blue-chip FTSE 100 index by 7%, while over the past five years, it has outperformed the lead index by around 55%. And as the COVID-19 vaccination is well underway in most countries and investors are looking for fresh investment opportunities, the stock has rallied in recent months. Jumping by more than 45% from its lowest level in March 2020, the stock is currently trading over £3,000.

The company has also seen some growth in certain areas. For instance, sales in North America increased by 12.3%, driven by resilient consumer demand and the share growth of total beverage alcohol, as well as the replenishing of stock levels by distributors and retailers, all of which has helped to offset declines in other regions. In fact, the lion’s share of its net sales, amounting to about £11.75 billion was generated in North America. Scotch accounted for the largest net sales share worldwide in 2020, while beer and vodka came second and third respectively. At the same time, both its underlying fundamentals including its massive brand power and its global revenue distributed over a wide range of markets, places it at a favourable position.

What’s more, the company has made some smart moves to keep its name in consumers’ minds. Back in March of 2020, Diageo pledged to help create more than 8 million bottles of hand sanitiser by donating up to two million litres of alcohol to manufacturing partners so as to help protect frontlines in their fight against COVID-19.

What’s next for Diageo?

Looking ahead and beyond the pandemic, Diageo is investing in new products and looking to tap into the premium and alcohol-free space. As recently as March 8, the company announced that it has bought Far West Spirits, a Texas-based company, owner of the Lone River Ranch Water brand that produces hard seltzer. Distributed throughout Texas, Alabama, Arizona, Florida and Tennessee, the brand’s sales topped $5.5 million. The deal is set to help Diageo gain market share in what is considered a fast-growing industry.

But it’s not just about the acquisitions. Diageo’s broad portfolio and geographic footprint, coupled with its leading market position and ability to execute at scale can serve as a solid foundation for the future. A quintessential brand and world-leading stout, Guiness is one of the most prestigious of black beers, brewed in over 50 countries and enjoyed in around 120 worldwide, with the UK, Nigeria, Cameroon and the U.S. among its top consumers. On the other hand, Irish cream liqueur Baileys, became a pandemic bright spot for the company, with a 7.5% increase in UK sales and 9% growth in U.S. sales in 2020.

With its strategy focused on its premium brands, the company has moved a step forward announcing in November 2020 a 10-year plan which centres on quality and not quantity of its products, achieving net-zero carbon emissions across its direct operations and reducing the amount of water needed to craft every drink. In an increasingly competitive market, factors such as these can make all the difference and can help Diageo stand out.

How to invest in Diageo (DGE) stock with Moneybase Invest

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To do so:

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  • Select the instrument of your choice from the list and then click on the Buy button on the window located at the bottom of your screen.
  • On the New Order page, input the number of shares you would like to purchase and hit the Place Buy Order. DGE has been added to your portfolio.

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