Dividend Investor Portfolio #27: High Spirits
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Dear Investor,
Welcome to the 27th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: September 23, 2024
Markets rose for the second consecutive week, driven mostly by the Federal Reserve’s first interest-rate cut in four years. The S&P 500 (SPX) gained 1.36%, and the Dow Jones Industrial Average (DJIA) rose by 1.62%. Both the benchmark and blue-chip indexes logged new records. Meanwhile, the Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) increased by 1.49% and 1.42%, respectively.
Stocks treaded water early in the week as investors awaited the monetary policy decision, with speculation about the size of the cut at the center of attention. Markets surged following Wednesday’s announcement of a 0.50% rate decrease, but the initial euphoria faded as Fed Chair Jerome Powell said he doesn’t expect additional “jumbo” rate cuts. Still, stocks soared on Thursday in a delayed rate-cut rally, as investors regained optimism regarding the economic outlook and returned to large-cap tech trades. Friday closed on a softer note amid heightened geopolitical tensions in the Middle East and a weak outlook from FedEx, which is considered a bellwether of the broader economy. Additionally, volatility surged as Friday marked a “triple-witching” event—the simultaneous expiration of stock options, index options, and futures contracts.
The 50 bps rate decrease highlighted policymakers’ confidence that inflation is falling, but it also raised concerns about labor market trends. Still, most of the recent data has been positive, adding evidence to the “soft landing” scenario. An increase in retail sales reflected the continued strength of the consumer, while an unexpected decline in jobless claims helped dissipate job-market worries. This week’s consumer confidence report and the final estimate of Q2 GDP growth will provide additional data about the economy’s strength, while the Core PCE release will reveal whether inflationary pressures have continued to ease.
If this and subsequent data confirm further weakening of inflation, the central bank is expected to follow through on its aim to gradually reach a level of around 3%, considered economically neutral. From a market perspective, history shows that rate decreases in the absence of a recession lead to strong equity returns. However, stock valuations are high relative to historical levels, which may leave less upside for stocks compared to previous easing cycles that occurred during a soft landing .
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This Week’s Quality Dividend Stock Idea
Diageo Plc (DEO), (GB:DGE) is a British multinational company that produces, markets and sells alcoholic beverages. Headquartered in London, England, it is the global leader in alcoholic beverages, owning over 200 brands across spirits and beer and selling them in over 180 countries. Diageo shares are traded on the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE).
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History Full of Spirit
The company traces its roots to the Scotch whisky distillers and the Irish beer makers of the 17th century, as well as to the Russian vodka distillers and London gin makers of the 1800s. Diageo was established in its current form in 1997 through the merger of Guinness Plc., the world’s largest brewer of stout, and Grand Metropolitan, which was a British leisure and property conglomerate.
Following the merger, the newly formed Diageo shed its non-core assets – those not related to alcoholic beverages – to focus on premium drinks. The divestitures included Burger King and Pillsbury, among other assets and brands. These divestitures not only provided capital for new M&A activities but also helped the company focus on what it does best.
In the 2000s, Diageo embarked on an international expansion via acquisitions of and investments in alcohol beverage businesses around the world. These included United Spirits Limited in India, Tequila Don Julio in Mexico, and Chinese baijiu company Sichuan Shuijingfang, among others.
Following these acquisitions, Diageo now owns 20 of the world’s top 100 spirits brands, including Johnnie Walker, Smirnoff, Baileys, Captain Morgan, Tanqueray, Guinness, and others. It continues its strategy of acquiring high-quality brands at the premium end of the market that have a good runway for growth. Thus, in 2017 it bought the George Clooney-founded super-premium tequila brand Casamigos, which began paying off almost immediately. In 2020, Diageo agreed to buy Davos Brands, which co-owns Aviation American Gin with Hollywood star Ryan Reynolds.
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Diversified, Versatile, and Resilient
As a result of its strategic acquisitions, Diageo has become the sixth-largest beverage company in the world by revenue, maintaining a strong position both in global and U.S. markets. In the U.S., DEO holds the largest share of the spirits market by volume, amounting to 15%. DEO holds the #1 global rank in International Spirits and is ranked the third-largest player in total beverage alcohol (TBA) by value globally.
The TBA market is huge, evaluated at $1 trillion, and growing by ~4.5% annually. Most of the market’s growth comes from the increase in the legal purchase-age population and the rise of consumer purchasing power, with both factors far more pronounced in emerging markets (such as China and India) than in developed economies. Thus, Diageo’s increased focus on emerging markets, reflected in its acquisitions and investments, is expected to continue driving sales growth.
The lion’s share of Diageo’s revenues, 35%, arrive from the United States. Europe is responsible for 21% of revenues, while Asia Pacific, Latin America, Africa, and North America outside the U.S., supply smaller, but significant contributions. The company’s wide geographical diversification adds to its revenue resilience, as growing sales in some end markets can compensate for a slowdown in markets experiencing a down leg of the demand cycle. For example, in fiscal 2024, robust sales growth in Africa, Asia Pacific, and Europe mostly offset declining sales in the Western hemisphere.
Scotch accounts for the largest part of Diageo’s global net sales, 25%, while beer is responsible for 15%. Beer and vodka came second and third, respectively. Other main product categories include tequila, whiskey, and Chinese White Spirits. In addition, through its 34% ownership of Moët Hennessy, the wine and spirits division of LVMH, DEO gained exposure to the premium champagne and cognac end markets. This product versatility drives revenue resilience: in FY 2024, strength in Chinese White Spirits, beer, and whiskey sales more than compensated for weakness in the scotch and tequila markets.
Diageo has brands in more categories than any other competitor, including its unique participation in the Chinese White Spirits market, among others. In fact, the company has 13 brands which bring in at least a billion dollars in annual revenues across its main categories. DEO’s strong market position and size create notable scale advantages, while its top brands command significant pricing power. In addition, Diageo is highly resistant to recessions, as demand for beer and non-premium spirits remains steady, or even rises, during economic downturns.
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Dividend Aristocrat with Strong Ratings
Diageo is a financially robust company. While it does have a large debt load, DEO’s high credit ratings – “A3” at Moody’s and “A-” at Fitch and S&P, the highest among its global alcoholic beverages peers – confirm its financial strength.
Thus, Fitch stated that Diageo’s business profile is also stronger than any other spirits producer, applauding the company’s large scale and highly diversified brand portfolio. The credit-rating company also praised DEO’s sizable free cash flow generation and its ability to drive organic sales growth through channel and brand portfolio management and innovation. Fitch said that Diageo “benefits from stronger credit metrics, stricter financial discipline, more diversified product portfolio, and greater ability to increase sales by increasing exposure to high-growth categories” than its competitors. Thus, in the past three years, Diageo’s revenues have grown at a CAGR of 8%, while its EPS rose at a 7% rate. In this period, inflation and other macroeconomic headwinds depressed sales and income at most of the company’s competitors.
Diageo’s financial strength and strong operating performance support its dividend profile. The company has been paying dividends for the last 37 years, increasing them annually, which makes it a Dividend Aristocrat (a company that has raised its dividend for over 25 years).
DEO’s payout has grown at a CAGR of 4.5% over the past five years; analysts expect it to continue increasing at about the same rate in the foreseeable future. The company’s moderate earnings-based and cash-flow-based payout ratios allow for the outlook of further dividend growth. The latest dividend increase was in July when the annual payout was raised by 5%.
DEO pays its dividends semi-annually, with an interim dividend coming in April and a final dividend in October. The approximate split between the two payments is 40/60. Diageo’s U.S.-traded stock now pays $4.12 per share annually, currently amounting to a dividend yield of 3.20%, which is considered a notably high yield among Dividend Aristocrats.
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Aristocracy at a Bargain Price
Besides dividends, Diageo compensates its shareholders through share repurchases. In fiscal year 2024, which ended on June 30th, the company completed a $1 billion buyback program announced in August 2023. The management is expected to announce a new buyback program at the company’s annual general meeting at the end of September.
DEO stock declined ~15% in the past year, depressed by investor worries over falling sales in Latin America and the Caribbean region (LAC), which weighed on overall revenues. However, analysts view these economy-induced headwinds as short-term run-of-the-mill issues, with long-term growth prospects remaining intact. In addition, global beverage alcohol demand is expected to begin its recovery in 2025, with most of the forecasted growth coming from the U.S., China, and India, where Diageo has a strong presence.
In the past months, several analysts from leading global houses – including Citi, RBC Capital, and Bank of America Securities – upgraded DEO price targets, sparking a rebound in stock performance. Analysts are convinced that the sell-off was excessive as the company’s revenue growth is slated to improve this fiscal year. However, the stock still trades deep in the bargain zone, carrying a notable discount to the U.S. Consumer Staples sector, and coming in at the bottom of the valuation scale for its global competitors. Taking into account its future cash flows, Diageo looks undervalued by about 45%.
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Investing Takeaway
Diageo Plc is a quality beverage alcohol business with a vast portfolio, significant global presence, and large market shares in key product categories and geographies. Despite short-term headwinds, the company has continued to display financial discipline, strong operational performance, and alignment with shareholder interests. Its best-in-class credit ratings confirm its reliability as a dividend payer, which is also reflected in its long track record of annual payout increases. These factors, coupled with its current historically low valuation, make DEO a valuable addition to long-term income portfolios.
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Dividend Investor Portfolio
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Portfolio News
¤ The Ex-Dividend date for Philip Morris (PM) is September 26th. The dividend, payable on October 10, 2024, will be 3.8% higher than the previous one.
¤ BlackRock (BLK) has announced the launch of a new $30 billion AI infrastructure fund, established in cooperation with Microsoft, Global Infrastructure Partners, and MGX. The fund, which will launch under the name of Global AI Infrastructure Investment Partnership, will make investments in new and expanded data centers to meet the growing demand for computing power for AI development. It will also invest in energy infrastructure to support AI data centers. The partnership will largely focus on investments in the U.S. and utilize Nvidia’s expertise in the AI sphere.
¤ Qualcomm (QCOM) has lost its court appeal against a European Union antitrust penalty issued in 2019 and related to the alleged abuse of QCOM’s dominant market position in 2009-2011. However, the fine was slightly reduced, amounting to $239 million euros ($266 million).
¤ JPMorgan Chase & Co. (JPM) declared a quarterly dividend of $1.25 per share, an increase from the prior quarterly dividend of $1.15 per share. The dividend is payable on October 31st, 2024, to stockholders of record on October 4th, 2024.
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Recent Trades
None at the moment, although we are constantly evaluating stocks for a possible addition to the portfolio. Stay tuned.
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Portfolio Attributes
| Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
| 3.64% | +9.97% | $3,855.72 |
| Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
| Automatic Data Processing (ADP) | Sep 10, 2024 | Oct 03, 2024 | 2.16% | $5.60 |
| Allianz SE ADR (ALIZY) | May 08, 2025 | May 13, 2025 | 5.25% | $1.50 |
| Amgen (AMGN) | Nov 15, 2024 | Dec 06, 2024 | 2.62% | $9.00 |
| BlackRock (BLK) | Sep 09, 2024 | Sep 23, 2024 | 2.41% | $20.40 |
| Edison International (EIX) | Sep 27, 2024 | Oct 31, 2024 | 3.97% | $3.12 |
| EOG Resources (EOG) | Oct 17, 2024 | Oct 31, 2024 | 3.95% | $3.64 |
| JPMorgan Chase (JPM) | Oct 05, 2024 | Oct 31, 2024 | 2.86% | $5.00 |
| Kroger (KR) | Nov 15, 2024 | Dec 01, 2024 | 2.12% | $1.28 |
| LyondellBasell (LYB) | Nov 24, 2024 | Dec 04, 2024 | 5.27% | $5.36 |
| Philip Morris (PM) | Sep 26, 2024 | Oct 10, 2024 | 5.95% | $5.40 |
| Qualcomm (QCOM) | Sep 05, 2024 | Sep 26, 2024 | 1.85% | $3.40 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
