Emerging Market Exposure Through a Solid Dividend Producer
Ron is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
British spirits maker Diageo (NYSE: DEO) yields a 3% dividend. At its current price Diageo isn't exactly a bargain – I've read analysts advising not to buy this stock above $80/share. But I am a buy-and-hold investor who thinks the price will ultimately go up. I love dividends so I prefer to own the stock and collect dividends rather than wait and hope that the price goes down to an arbitrary number before it continues to rise. If the price goes down, I'll buy more. My long-term positive outlook for Diageo is based on their stated goal of having 50% of their net sales come from emerging markets by 2015. Currently Diageo boasts eight of the world's top 20 liquor brands which they sell through a vast international distribution system throughout more than 180 countries. Emerging and developing markets, which account for about one-third of Diageo's revenue, posted double-digit growth for them in the past year.
Regulatory approval has been granted for Diageo to own a majority shareholding in the joint venture Chinese White Spirits Company (Quanxing). Diageo is currently seeking approval from the China Securities Regulatory Commission to launch the required mandatory tender offer for the outstanding shares of Shui Jing Fang (of which Quanxing holds a 39.7% equity stake). Chinese white spirits represent over 50% of the Chinese total beverage alcohol market. As the only international spirits company to participate on a significant scale in the super-premium Chinese white spirits category, Diageo is able to extend Shui Jing Fang's sales internationally. Through Diageo’s partnership, Shui Jing Fang is already available in 22 international airports, on board three international airlines and in six domestic markets; with plans to make it available to the UK and Japanese markets before the end of the financial year.
Anticipating economic and population growth, Diageo has invested heavily in developing a footprint in Africa as evidenced by the fact that 25% of their global workforce is currently employed in Africa. This past year they have established a controlling stake in the Serengeti Breweries in Tanzania and acquired top Ethiopian brewer Meta Abo. The Serengeti Breweries form an integral part of Diageo's East Africa supply footprint providing additional capacity to Kenya and Uganda.
Earlier last year, Diageo completed the acquisition of Mey Icki, Turkey's largest spirits company. Mey Icki is the biggest Turkish vodka manufacturer as well as the producer of raki, the national drink which accounts for 80% of the spirits consumed in Turkey. While Mey Icki gives Diageo a new distribution network for the growth of their own premium brands, they also plan to launch Mey Icki's Turkish brands in Germany, the US, Russia and countries sharing a border with Turkey.
Diageo acquired a 30% equity interest in Halico in Vietnam. Diageo considers the Halico acquisition a breakthrough in their participation in this huge local spirits category. Halico is the largest producer of branded spirits in Vietnam, led by flagship brand Vodka Hanoi. Diageo will continue to develop its international premium spirits portfolio, led by Johnnie Walker, Smirnoff and Baileys, through its wholly owned subsidiary Diageo Vietnam, Limited.
About ten years ago, Diageo divested itself of the local Indian whiskey Gilbey's Green Label, saying it wanted to focus on international brands. Recently Diageo has returned to the competitive whiskey market of India, marking a change from their previous strategy. Now they are acquiring local breweries and spirits manufacturers for the purpose of distributing their premium international brands but also to give regional and national labels new international exposure.
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