With the Fed planning to keep rates at historical lows through 2015 and Treasuries barely covering inflation, I’m led to search for yield in unique places. This includes turning to beer and liquor to solve my problems. There is no denying that alcoholic beverages are a favorite in tough economic times, helping us drown our sorrows, but they are also popular in a booming economy, being a fundamental part of helping us enjoy our successes. There are a couple of the stocks below that I believe are growth and income plays.
My top pick in the liquor industry is Diageo plc (ADR) (NYSE: DEO)
, which has a number of lower-end, reasonably priced choices, while also catering to the high-end consumers. Key brands for the London-based company include Smirnoff, Johnnie Walker, Captain Morgan, Tanqueray, Crown Royal and Guinness. Smirnoff is its leading brand by volume, and Johnnie Walker the leader by value. Last quarter, Diageo posted organic revenues growth of 5%, along with solid performance in Africa. Latin America is also performing well, where volume for the region was up 2% year over year, and the company hopes to further penetrate emerging markets. It has also acquired over 50% of India’s largest spirits company, United Spirits Ltd. The positive of this acquisition is the fact that India is the world’s most populous country.
The big draw to Diageo plc (ADR) (NYSE: DEO) is not just its 2.4% dividend yield, but its valuation and industry-leading operating margin. Diageo’s trailing twelve month operating margin is 34%, compared to top peer Beam’s 25% (see how Diageo stacks up head to head versus Beam).
BEAM Inc (NYSE: BEAM) is the world’s fourth largest premium spirits company, and the second largest in the United States. Top brands include Jim Beam (bourbon), Maker’s Mark (bourbon) and Courvoisier (cognac). One positive for BEAM Inc (NYSE: BEAM) is its geographically diverse revenue streams. Markets outside of North America make up around 44% of sales, with 22% derived from Europe, the Middle East and Africa, and another 22% from Asia and South America.
BEAM Inc (NYSE: BEAM)’s predecessor, Fortune Brands, helped position the company with a nice balance sheet. Fortune had sold off its golf business and spun off its home and security business in 2011, using the proceeds ($1.1 billion) to pay down debt. Although BEAM Inc (NYSE: BEAM) has the best balance sheet, with a long-term debt to equity ratio of 44%, compared to Brown-Forman Corporation (NYSE: BF.B) (69%) and Diageo plc (ADR) (NYSE: DEO) (99%), its valuation and recent performance make the company relatively unattractive. Last quarter’s results showed weakness, with EPS of $0.67 coming in below the $0.71 consensus estimates and below the $0.69 posted in the same quarter last year. However, billionaire Bill Ackman still has a large part of his hedge fund invested in Beam after his activist campaign at Fortune Brands (check out all of Akcman’s stocks).
Brown-Forman Corporation (NYSE: BF.B)
is one of the leading producers and distributors of premium alcoholic beverages in the world. Key brands include Jack Daniel’s, Southern Comfort and Finlandia. Last quarter earnings came in at $0.80 per share, up 10% year over year, with the big news being upgraded 2013 guidance. Its outlook for 2013 now includes full year EPS in the range of $2.58 to $2.70, up from its earlier guidance of $2.40 to $2.67. Also, the company raised its forecast for operating income growth to the low-double-digits from high-single-digit growth. The company is building a new manufacturing facility in Alabama to help meet improved demand for Jack Daniel’s whiskey barrels, while also strategically re-positioning its Japan distribution facility in an effort to better capture market share.