Certainly, one of the industrial sectors that suffered the most during the Covid-19 pandemic was the alcoholic beverages industry. As a result of the pandemic, people either would not or could not spend time in pubs, bars, cafes, restaurants and other places where alcohol can be purchased.
This had an impact not only on the turnover of many companies operating in the food service and hotel industries, but also on that of producers of alcoholic beverages who inevitably saw their orders fall drastically.
Despite the rekindling of some small fears for a new wave of restrictions following the onset of new variants of the Coronavirus, the worst seems to be behind Diageo's core markets such as the U.S. and other markets with high vaccination rates.
Many operators in the industry see the U.S. and European markets in a continuous and strong recovery, though emerging markets still provide the best opportunity for alcohol producers to improve their margins.
Amid global beverage alcohol producers, Diageo PLC (DEO, Financial) is strongly positioned to benefit from the cycle. Across spirits and beer categories, Diageo is without a doubt an international leader as it holds an outstanding portfolio of brands. Some of these brands include names such as Johnnie Walker, J&B, Buchanan’s, Crown Royal, Windsor whiskies, Smirnoff and Cîroc as well as Ketel One vodkas, Baileys, Captain Morgan, Don Julio, Tanqueray and Guinness.
This is a collection of products that needs no presentation, consisting of beverages that are consumed daily all over the world, with sales taking place in almost 200 different countries. These names make Diageo’s portfolio of activities resilient enough to economic recessions and slowdown. In fact, what better test for Diageo's brand name is there other than the pandemic crisis? While many other businesses have seen their finances deteriorate to the point of seriously endangering the continuity of their operations, Diageo has instead seen organic sales increase despite headwinds and unfavorable dynamics on the currency markets, surprising market expectations broadly.
Furthermore, a prudent approach with regard to the allocation of financial resources and the implementation of a rigid policy on non-essential spending has made it possible to keep the organic operational profit margin practically intact.
Looking forward to the near-term future, Diageo expects to deliver 14% growth in terms of higher organic operating profit, producing a positive impact on the creditworthiness of the company with the net debt-to-Ebitda ratio, which is now at 3.5, expected to decline to 2.5 in a year. As of the first half of fiscal 2021, which ended on Dec. 30, 2020, adjusted net debt was about $12.8 billion, while the adjusted Ebitda hovered $3.6 billion.
These growth objectives will be achieved thanks to strong U.S. consumer demand, which is projected to continue to be highly supportive, and the European demand, which will provide an additional contribution with the reopening of the on-trade channel up to full capacity. The African, Asian Pacific and Latin American markets should also increase as recovery goes on.
The company has cash on hand of $2.85 billion, giving it the confidence to pledge to repurchase $700 million worth of shares about four months from now. Backed by this, the share price should trade higher, eventually hitting the average Wall Street price target of $209.84 within a few months.
Shares are trading at $193.98 per unit for a market capitalization of $113.35 billion, a price-sales ratio of 7.14 versus the industry median of 2.35 and a price-earnings ratio of 72.13 versus the industry median of 27.56.
The stock is not at its cheapest. However, this is an investment that will deliver brand name value and benefit from the payment of semi-annual dividends. The most recent payment of $1.535 per common share was made on April 13 for a forward dividend yield of 1.92%, beating the S&P 500’s 1.35% as of June 25.
Disclosure: I have no positions in any securities mentioned in this article.
