A Great Dividend Stock Just Got Better

"As Africans grow richer, they drink more Scotch." Well, don't we all?

The quote is from the Oct. 1 issue of The Economist, in which it covers Diageo's (NYSE: DEO  ) full-on marketing push to convince middle-class Africans to "trade up" their choice of alcoholic beverage from beer to premium whisky, preferably the company's own variety, Johnnie Walker. With a dividend yield of 4%, the London-based Diageo is already a premium income investment. This well-thought-out push into an emerging economy makes the case it could be a premium growth stock, as well.

Keeping out of the cookie jar
If you drink alcohol of just about any variety, it's hard to get away from Diageo's brand reach. In addition to Johnnie Walker, Diageo is home to Tanqueray gin, Smirnoff vodka, Jose Cuervo tequila, Guinness stout, and Sterling Vineyards. But don't worry. It doesn't look like anyone at the company is dipping into the product on the job, as these numbers attest:

  • The company owns nearly one-fifth of the world's top 100 liquor brands, including eight of the top 20, and sells its products in more than 180 countries.
  • The company made $15.9 billion in total revenue this year, up 9% from the year before. Revenue for peer Constellation Brands (NYSE: STZ  ) was down for the same period.
  • The overall gross margin for fiscal 2011 was 60%, versus 56% for peer Anheuser-Busch Inbev (NYSE: BUD  ) in 2010 (Anheuser-Busch does not have 2011 gross margin figures available yet).
  • Over at Molson Coors Brewing (NYSE: TAP  ) last year, net income was down. Diageo's net profit was up 24% with a net profit margin of 20%.

Clearly, the company knows how to make and distribute alcoholic beverages efficiently and profitably around the world.

Africa, here we come ... again
According to The Economist, "Johnnie Walker has a long history south of the Sahara." It came to the continent as early as 1887, when the company introduced the product in South Africa. Having to come all the way from Scotland, the square bottle made it easy to pack and ship. And since whisky is drunk at room temperature, the hot climate conveniently suits whisky drinking norms.

But belying whisky's history in the region, by global standards Africans don't drink much of it. The typical Frenchman drinks 40 shots of whisky per year. The typical Nigerian? Only a third of a shot. Still, numbers show Africans have a taste for the stuff. In the first six months of 2011, they bought $147 million worth, up by 34% over last year. Hence Diageo's big Johnnie Walker marketing push, one the company is getting right.

Hey, everybody, look at what I'm drinking
"Johnnie Walker is a useful signifier of success," Nick Blazquez, the head of Diageo for Africa, told The Economist. As such, the company is downplaying the drink's Scottish origins, and marketing it purely as a status symbol. And the company is putting in the proper amount of thought, time, and money into the effort:

  • A 20-story billboard on the side of a skyscraper will stridently sell the citizens of Nairobi on the merits of Johnnie Walker Black.
  • Print ads featuring Olympic gold medalist Haile Gebrselassie will run throughout Africa, in a deal reported to be worth $100,000 to the Ethiopian runner.
  • The company has a history of training bar staff in the finer points of serving Scotch, a drink many have never worked with before.

Last call for high yield and growth
According to The Economist, Scotch, like any other status symbol, tends to sell well in hierarchical societies, which Africa certainly is. And Diageo's own market research shows that Africans will indeed trade up, given a proper nudge, as has happened in other emerging markets. The stars seem to be aligning for the company's Johnnie Walker push there.

The stock itself has seen steady growth since the financial implosion of 2008-2009, and is now trading for around $82 per share, with a very reasonable P/E of 17. And with luxury brand valuations being driven higher and higher of late, there's room for share price appreciation here, too, on top of the generous 4% dividend the company is already paying.

Diageo has the brand strength, financial firepower, and marketing savvy to spread the gospel of Scotch across Africa. Now that's something to raise a glass to, and here's something else: a free report detailing 13 high-yielding, dividend stocks our Foolish analysts have discovered. To get your copy while it's still available, click here.

Nothing comes between Fool contributor John Grgurich and his best highlands kilt. On a less personal note, he owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of Molson Coors Brewing and Diageo. Motley Fool newsletter services have recommended buying shares of Diageo and Molson Coors Brewing. 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 has an absolutely scintillating disclosure policy.


Read/Post Comments (6) | Recommend This Article (10)

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 October 14, 2011, at 6:37 PM, midnightmoney wrote:

    John,

    Which part of Africa--indeed, which of its fifty-something countries, and its thousands if not millions of societies--are you referring to when you say 'it' is a hierarchical society? Do you mean Africa is a hierarchical continent? How bout Asia, then, or South America, what in a word are they like?

  • Report this Comment On October 14, 2011, at 7:35 PM, XMFGrgurich wrote:

    I hear you. It's a bit of a broad statement overall, isn't it? The point is, Diageo's making a big push continent wide, and they're making certain assumptions in the process. They have to start somewhere with their marketing, I suppose. We'll see how it turns out, won't we?

    Thanks for the comment, midnightmoney.

  • Report this Comment On October 17, 2011, at 4:56 PM, ByrneShill wrote:

    I don't know how you come up with a 4% dividend. Dividends in 2011 were 1.631$ (sept 7th) and 0.996 (March 9th), for a total of 2.627.

    At the current price of 79.72$ per share, that's a 3.3% dividend. Not bad at all, but far from 4%.

  • Report this Comment On October 18, 2011, at 12:02 PM, theleisureclass wrote:

    The author didn't mention that Africans already consume boatloads of Guiness, another DEO brand. So, is DEO cannibalizing its own brands? Or, increasing markets for both?

  • Report this Comment On October 18, 2011, at 2:31 PM, XMFGrgurich wrote:

    ByrneShill, frankly, I just pulled the number from Yahoo! Finance, and they're still using the same number. Now, FinViz.com is closer to your number. I'm going to do some checking. Way to keep your eye peeled, though. Thanks.

  • Report this Comment On October 18, 2011, at 2:33 PM, XMFGrgurich wrote:

    So Africans like their Guinness, too? No surprise there. And I'm sure Diageo will figure out a way to sell both stout and whisky to them. No fear.

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