The Big Money Says to Buy Diageo

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: Diageo (NYSE: DEO  ) . Are institutions bullish or bearish when it comes to this U.K.-based brewer and distiller of alcoholic spirits?

Foolish facts

Metric

Diageo

CAPS stars (out of 5) *****
Total ratings 2,360
Percent bulls 98.1%
Percent bears 1.9%
Bullish pitches 409 out of 419
Highest rated peers Brown-Forman (NYSE: BF-B  ) , Constellation Brands

Data current as of Nov. 27.

Chances are you or someone you know spent time with Diageo during the just-completed Thanksgiving holiday weekend. This, after all, is the company that brews Guinness and distills Johnnie Walker scotch, Tanqueray gin, and Bailey's Irish Cream liqueur.

But Fools love this 11 O'Clock Stock for more than its tempting product line. Dividends are what make Diageo's shares mouthwatering, as Motley Fool Income Investor advisor James Early wrote in July:

Investors have watched Diageo raise its dividend nicely since it began payouts 12 years ago. Diageo doesn't shoot for the moon here, but has maintained a payout growth rate of 5.4% annually over the past half-decade. It yields 4% at current prices, and U.S. investors will appreciate that there's no British withholding tax on U.S.-bound dividends. If you're looking for an international investment, it doesn't get much easier than Diageo.

He's right. Investors who've held and reinvested dividends in Diageo over the past five years have enjoyed a 50% gain versus a 3% return for the market-tracking S&P 500 SPDR (NYSE: SPY  ) .

Institutional ownership history

Top Owners

2007*

2008*

2009*

Latest*

BlackRock

8,883,194

12,839,756

153,694,930

157,477,648

Capital Research and Management

155,553,200

155,553,200

124,653,096

124,653,096

Legal & General Investment Mgmt.

8,695,564

8,607,648

99,894,002

99,894,002

Legal & General Group Investment

107,824,143

107,824,143

99,894,002

99,894,002

Harris Associates

46,481,731

45,928,696

47,310,992

65,462,399

TOP 25 TOTAL

595,246,034

651,091,709

887,625,540

952,942,268

Source: Capital IQ, a division of Standard & Poor's. *Indicates the number of shares owned.

Even without reinvesting, owning Diageo would have produced market-beating returns. But not to the same degree: Roughly half the stock's five-year, 25% total return can be attributed to dividends.

Whether institutions took advantage is unknown, but my guess is no. Large funds prize liquidity, and accepting dividends as cash provides that. Nor does it matter. A 4% yield amounts to a superior return when the market runs flat, as it has for most of the "Lost Decade" we're exiting.

Big Money investors find the combination appealing. They've added significantly to their positions in Diageo since 2007 and in each of the past six quarters. Legal & General Investment Management has upped its stake tenfold.

Competitor and peer checkup

Company

Institutional Ownership

Insider Ownership

Anheuser-Busch InBev (NYSE: BUD  ) 22.53% 0.60%
Brown-Forman 39.66% 30.42%
Diageo 55.99% 0.11%
Fortune Brands (NYSE: FO  ) 78.25% 0.35%
Molson Coors Brewing (NYSE: TAP  ) 76.95% 1.20%
SABMiller plc 30.59% 0.28%

Source: Capital IQ. Data current as of Nov. 27.

Of the stocks in this list, Jack Daniels distiller Brown-Forman has the most intriguing ownership profile -- less than 40% of its owners are Big Money investors -- but Diageo's numbers are almost as interesting.

Insiders don't own much, but this isn't unusual for a business that's been around since 1886. The original owners have long since passed on. More importantly, less than 60% of today's owners are institutions. There's plenty of room for them to buy more and push the stock higher if the underlying business continues to impress. I believe they will, which is why I've rated Diageo to outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like Diageo at these levels? Let us know what you think using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Interested in more info on Diageo? Add it to your watchlist by clicking here.

BlackRock and Molson Coors are Motley Fool Inside Value picks. Fortune Brands is a Motley Fool Stock Advisor selection. Diageo is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Diageo and Molson Coors and is also on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.


Read/Post Comments (1) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 29, 2010, at 6:42 PM, weswood wrote:

    I'm not trying to criticize here, but this is a very very common mistake that I see in many many financial articles about European ADR's...

    Diageo (like most European companies) pays one smaller interim dividend and one larger final dividend. Most brokerages and financial sites use auto-aggregated data which don't take this into account.

    The 4% yield for Diageo shown on most sites is wrong, and is calculated by taking only the larger of the two dividends and then doubling it.

    Per Diageo's investor relations site, the 2009 dividend was $.82 interim and $1.45 final = $2.27 total = 3.1% based on today's closing share price of $72.25. The company plans on increasing the divi by 6% this year which puts the forward total at $2.41, or 3.3%.

    So while Diageo's dividend is inflated on most sites right now, this also works in the reverse... many sites show weaker yields for European companies. One such example would be National Grid: NGG.

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