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

Premiumisation may be a horrible made-up word, but it is an accurate description of consumers’ habits at present.

Most people are battling the cost-of-living crisis, but at the same time are permitting themselves a few little luxuries.

They are ‘spending to make the moments count’ in the words of Sir Ivan Menezes, chief executive of Diageo, the FTSE 100-quoted £81billion drinks giant.

High-flyer: Actor Ryan Reynolds is a backer of Aviation gin

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

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

Diageo caters for this taste with such tequilas as 21 Seeds and Casamigos, acquired from another Hollywood star, George Clooney.

Diageo’s best-known brands include Guinness and Johnnie Walker whisky.

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

Menezes retires in July, leaving Diageo about ’36 per cent larger than it was before the pandemic thanks to its diversified footprint and advantaged portfolio’, as he puts it.

Is this the moment to place a bet on the continuation of his drinking-less-but-drinking-better strategy under the aegis of Debra Crew, the chief operating officer who is to become the new boss? Or does the current level of the share price raise doubts?

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

Diageo shares are down by 8 per cent over the past 12 months, seemingly because of fears of a softening of demand in America, despite the nation’s predilection for reassuringly expensive liquor.

Nick Train, the fund manager, attributes the fall more to British pensions funds’ decision to shun this and other ‘genuinely world-class UK companies’ in favour 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 last two are investment trusts).

Despite the pension funds’ stance, Diageo has some firm supporters among analysts in the UK and the US. Bernstein describes Diageo as ‘one of the best long-term growth stories in global staples’.

Jefferies, meanwhile, rates the shares a buy with a target price of 4000p, against the current 3684.5p.

The dividend yield is 2.25 per cent and the shares trade at a price-earnings multiple of 20.2 times, against a peak of 30 times at the end of 2021.

David Coombs, of Rathbones, will be using the dip to put more cash into the shares: ‘I’m happier to be in Diageo than in other consumer staple stocks, like 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 may not radically reshuffle the drinks cabinet, Forry wonders whether she may try to add more cognac. Diageo has a 34 per cent slice of Moet Hennessy, the division of the LVMH luxury goods conglomerate and the maker of Hennessy cognac. But LVMH is unlikely to sell, given the estimates for the increase in the global clientele for spirits.

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

For investors who are ethically opposed to alcohol because of the damage it can cause to health, these forecasts will be troubling.

But you can also take the view that Diageo has a vested interest in ensuring that ‘moderation is the norm’ and will use its promotional power to pursue this campaign.

If you have money in one of the Train funds, you already have exposure to this stock. I am going to build up a small holding because this spring I see the UK markets as cheap. If the shares prosper, I will celebrate with a Seedlip and tonic. 

Yes, I too have succumbed to premiumisation – just don’t try saying it after a few tequilas.

Share of the week: Tesco 

Tesco shares have surged by around 16% since the start of the year

The City is eagerly awaiting annual results from the country’s largest retailer.

Tesco will this week reveal how much Brits are feeling the pinch from rising food costs.

The supermarket has had to grapple with shoppers cutting spending and switching in droves to discounters, while seeing its own supply chain costs mount.

Analysts will be keen to see Tesco’s profit 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 its first update since a quarterly trading statement on January 12, Tesco will post its full-year results for 2022-2023 on Thursday.

The results will reveal whether the grocer has been able to hit guidance for profits of between £2.4billion and £2.5billion, which it was confident of meeting at its January update.

Food inflation is running at over 18 per cent, with staples including milk and pasta seeing dramatic increases.

UK households face an extra £837 on their annual grocery bills this year, according to the latest data from market insight company Kantar.

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said Brits were ‘seriously feeling the pinch’ 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 of keeping prices competitive but protecting its profit margins against its own inflationary pressures. 

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

Tesco shares were up 1 per cent on Tuesday, and have risen by around 16 per cent since the start of the year.