Diageo has a place in your portfolio – as well as your drinks cabinet

Premiumization may be a terribly made up word, but it is an accurate description of current consumer habits.

Most people are dealing with the crisis of the cost of living, but at the same time allow themselves a few small luxuries.

They ‘spend money to make the moments count’ in the words of Sir Ivan Menezes, CEO of Diageo, the £81bn FTSE 100-listed drinks giant.

More than half of sales now come from premium brands such as Smirnoff vodka and Aviation gin, in which Ryan Reynolds, Hollywood actor and financier of Wrexham FC, retains a stake.

Tequila is another popular indulgence, especially in the US, where the market share of spirits has surpassed that of beer.

Diageo caters to this taste with tequilas like 21 Seeds and Casamigos, sourced from another Hollywood star, George Clooney.

Diageo’s most famous brands are Guinness and Johnnie Walker whisky.

But these days it owns such hip drinks as Don Papa, a Philippine rum, and also offers alcohol-free products like Guinness 0.0, Gordon’s 0pc, and Seedlip for the fashionably sober among Gen Z and other demographics.

Menezes will retire in July, making Diageo about “36 percent larger than it was pre-pandemic thanks to its diversified footprint and favored portfolio,” as he puts it.

Is now the time to bet on the continuation of its drink-less-but-drink-better strategy under the auspices of Debra Crew, the chief operating officer who is to become the new boss? Or does the current share price raise doubts?

Diageo shares are down 8% over the last 12 months while Fever-Tree is down 27%

Diageo Shares are down 8 percent over the past 12 months, seemingly on fears of weakening demand in America, despite the country’s penchant for reassuringly expensive spirits.

Nick Train, the fund manager, attributes the decline more to British pension funds’ decision to shun this and other “genuine world-class British companies” in favor of excitement elsewhere.

Diageo is one of the largest holdings in Train’s funds: LF Train UK Equity, LF Train Global Equity, Finsbury Growth & Income and Lindsell Train (the latter two are mutual funds).

Despite the pension funds’ stance, Diageo has some strong analyst support in the UK and US. Bernstein describes Diageo as “one of the best long-term growth stories in global commodities.”

Jefferies, meanwhile, rates the stock a buy with a target price of 4000p, down from the current 3684.5p.

The dividend yield is 2.25 percent and the shares trade at a price-to-earnings ratio of 20.2 times, up from a high of 30 times at the end of 2021.

Rathbones’ David Coombs will use the dip to put more money into the stock: “I’m happier to be in Diageo than other staple consumer stocks, such as Procter & Gamble and Unilever, whose brands are more vulnerable to retailers’ own label goods.’

Alicia Forry, consumer analyst at Investec, is another fan: “Diageo is in a pretty good place right now.”

Forry expects more evolution than revolution under Crew, a former executive at Mars, Nestle and boss of the tobacco company Reynolds American.

While Crew is not allowed to radically rearrange the liquor cabinet, Forry wonders if she should try adding more brandy. Diageo owns a 34 percent stake in Moet Hennessy, the division of the luxury goods conglomerate LVMH and the maker of Hennessy cognac. But LVMH is unlikely to sell, given estimates for the increase in global spirits customer base.

By 2032, approximately 600 million people worldwide will be over the legal drinking age and more of them will be affluent enough to afford Diageo’s products.

For investors who are ethically opposed to alcohol because of the harm it can cause to health, these predictions will be alarming.

But you could also argue that Diageo has every interest in “moderation being the norm” and will use its promotional power to continue this campaign.

If you have money in one of the Train funds, you already have exposure to this stock. I’m going to build a small holding company because this spring I see the UK markets as cheap. When the stocks are booming, I celebrate with a Seedlip and tonic.

Yes, I succumbed to premiumization too – just try not to say it after a few tequilas.

Stock of the week: Tesco

Shares of Tesco are up around 16% since the start of the year

The city eagerly awaits the annual results of the country’s largest retailer.

Tesco will reveal this week how much the British are suffering from rising food prices.

The supermarket has had to deal with customers reducing their spending and switching to discounters en masse, while its own supply chain costs continue to rise.

Analysts will be eager to see Tesco’s earnings and market share, as well as anything it has to say about when the cost-of-living crisis could ease for its millions of customers.

In the first update since a quarterly trade review on January 12, Tesco will publish its annual results for 2022-2023 on Thursday.

The results will show whether the grocer has been able to meet profit expectations of between £2.4bn and £2.5bn, which it was certain to meet at the January update.

Food inflation is over 18 percent, with staples like milk and pasta rising dramatically.

UK households will get an extra £837 in their annual grocery bill this year, according to the latest data from market insight company Kantar.

Sophie Lund-Yates, chief equity analyst at Hargreaves Lansdown, said the British are ‘seriously feeling the pressure’ as prices rise and ‘Tesco’s scale means it is in the eye of that storm’.

The supermarket has had to strike a delicate balance between keeping prices competitive and protecting profit margins from its own inflationary pressures.

Although Tesco has a market share of 26.9 percent, it has faced competition from discounters Aldi and Lidl.

Tesco shares were up 1 percent on Tuesday and are up about 16 percent since the start of the year.