Trainline (TRN, UK) @ 430p on October 1st 2019
Diageo (DGE, UK) @ 3,526p on November 1st 2019
(Current returns are at the end of post)
This is a pure opinion post and is not in any way, shape or form advice. I do NOT advise you buy Diageo. This is purely my opinion to be challenged. Enjoy 😊
Shares I have invested in series
Sharing stocks that are in my personal portfolio, as I stated in my first post of this series here, is really daunting. I am openly showing everyone how my stock-picking capabilities are [or aren’t] performing.
If I invest in a stock and at the time of posting my portfolio, it is severely down, then I won’t sugar coat it. I’ll lay to bare that my personal portfolio is down. I am currently invested directly in
two three (one more post soon) stocks, with an overall aim of holding no more than 15 stocks and holding each one for a minimum of 10 years.
Whilst I do not put all (or anywhere near it) of my personal savings in stocks, there is still real money on the line. If you are considering whether to start investing and how and where to do it, I’ve written before about how to get started 😊
Why I have invested in: Diageo
So, the beverages conglomerate that is Diageo Plc. Whilst this is probably not the most controversial purchase, I nevertheless will explain the rationale behind it.
It is fair to say I’m NOT an expert and nor does this at all constitute any financial advice. I’m not telling you to buy this stock nor am I telling you to drink alcohol. I’m just journaling some thoughts on why I have bought this particular stock.
Here are my main drivers for buying Diageo:
- Growth prospects in growing economies
- Simple and timeless business model
- Different revenue streams
- Price and entry point
I drink lots of their products
1 ) Growth prospects in growing economies
Firstly, this one is borne out of experience. In 2017 I travelled to India and spent 6 weeks there. Whilst I was there, I couldn’t help but notice how much they adored Johnnie Walker Whiskey. If you think that Macdonalds or Coca Cole are over-advertised in the UK / USA, then this felt like nothing on the amount of Jonnie Walker Red Label adverts at every motorway service / change.
This enthused me to research who owned Jonnie Walker (take a wild guess) and the unit sales in India (and other growing economies like some African and South American countries). In 2018, the year after I visited the country, net sales of Scotch products in India was up 9% on the prior year. With underlying growth of the middle-class in India, I’d expect this growth to continue for a long time to come.
Johnnie Walker has over 5 large ‘labels’ that vary from pub-worthy to very expensive gifts, both of which I saw in my time in India.
I think my belief in this sales pipeline is based on some simple facts.
Alas, some simple facts:
- Johnnie Walker has a dominant market position in India
- India consumption is hard liquor heavy (rather than beer and wine)
- India has more individuals of drinking age than the population of US and Mexico combined
Naturally, there are obvious challenges, the sale of liquor is heavily regulated (and sometimes banned) in states of India. I am under no illusion that India will never have a drinking culture like the UK. But, after seeing the drink in numerous Bollywood films, advertising at every junction / airport, it is hard to ignore the brands’ position there.
2 ) Simple and timeless business plan
Diageo has a very simple business plan and works in an understandable industry. It sells (mainly) alcoholic beverages. It buys leading brands in different beverage sectors, often the most recognised brands in the world.
As long as it doesn’t overpay for the companies (brands) that it buys, this should mean that it always has a non-organic avenue to grow income and, ultimately, share price.
Furthermore, what this business plan means, too, is that it dictates certain markets. In Vodka, for example, it has Ciroc and Smirnoff. This is a high margin, ‘sexy’ and sought after drink. Alongside Smirnoff – which is probably in more countries than democracy is.
3 ) Multiple revenue streams
Here is a shortened list of the brands that Diageo own:
|Johnnie Walker||Captain Morgan||Ciroc||Tanqueray||Bailey’s|
“But J, these revenue streams are all in the same genre: Beverages”.
Yes, they are. I’m clearly buying into the belief that these beverages will continue to be the most popular acoholic drinks brands in the world. As the middle-class of the world grows (specifically, China / India / Nigeria, which will make up something like 50% of it one day), I think they will use Diageo products as they are already entrenched in their supply chains.
“Okay, but you do know people are drinking less?”
Interesting one. Alas, whilst people are drinking less per-head, here are 3 short rebuttals:
- I’m still talking about their growth in new markets. Which, by definition, if they drink 1 Guinness a year, is greater than 0.
- Diageo is aware and recently bought a stake in a non-alcoholic beer brand
- Less per head with growing populations equalises the equation. Wine, beer and whiskey trends ebb and flow etc. etc.
4 ) Price and entry point
This is where I will be putting my neck on the line. Not least as the average investor is looking to hold an index tracker, so the price / entry point / expected growth of any individual stock I buy needs to surpass this index tracker.
Moreover, without getting into the technicalities and boring everyone, let’s take a quite look at the price of Diageo today. A strong caveat needs to be made – that equity prices are very very high and are at the top of most valuation metrics on a daily basis at the moment. This is due, in large, to our rebound from the 2008 financial crash and a mixture of the following demand and supply factors
- Qunatative Easing by Central banks meaning there is literally more available cash out there
- Explosion of the index trackers / ETFs market meaning that there is more demand for the largest listed stocks
- A period of sustained economic growth. With both unemployment and wages going in a favourable direction
- Lowest interest rates ever, in most countries, leading to a ‘search for yield’ (see: return), again meaning more money is flocking to stocks.
Diageo @ 3,526p.
Firstly, this is my post commission price. I didn’t mean to buy it at this price but I also cannot claim to have bought it any cheaper as this is the effective price it is in my portfolio.
TRN up 11%
DGE down 4%
Lastly, under no conditions am I advising you to buy any stock that I have bought, nor do I advise that you invest in individual stocks at all. This is purely commentary on my life and not financial advice.