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Will Diageo Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

The liquor business is a huge staple of the world economy, and Diageo (NYSE: DEO  ) has a big portion of the global market. With brands ranging from Guinness beer to Smirnoff vodka and many more, the British company enjoys its place in an industry that tends to hold up reasonably well regardless of economic conditions. Nevertheless, times do change, and keeping up with the trends in beer and spirits is a constant challenge. Can Diageo keep the good times rolling? Below, we'll revisit how Diageo does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Diageo.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$67.7 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.33

Pass

 

Worst loss in past five years no greater than 20%

(32.6%)

Fail

Valuation

Normalized P/E < 18

23.03

Fail

Dividends

Current yield > 2%

2.4%

Pass

 

5-year dividend growth > 10%

1.9%

Fail

 

Streak of dividend increases >= 10 years

13 years

Pass

 

Payout ratio < 75%

53.3%

Pass

     

  

 

Total score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Diageo last year, the company has kept its six-point score. But the stock has shown considerable strength, rising about 35% over the past year.

The world of alcohol is a contentious one right now, as popular brands seek to establish themselves in faraway places. That has set off a wave of battles throughout both the beer and the spirits industries, with beer niche player Boston Beer (NYSE: SAM  ) seeking to hold off behemoths Anheuser-Busch InBev and Molson Coors (NYSE: TAP  ) despite the entire industry suffering from rising input costs on raw ingredients like barley. Meanwhile, Diageo plays a leading role in spirits, but it has plenty of competition nipping at its heels as well.

Recently, though, Diageo has done a good job of maintaining its earnings strength. Last week, the company reported that full-year sales jumped 10%, with spirits responsible for the lion's share of the growth. With the Caribbean and Latin American regions acting as important components of Diageo's overall strategy, good results there bode well for the company overall.

Another part of Diageo's strategy is seeking smart acquisitions. With buyouts in China, Turkey, and Brazil, the company is expanding its international reach. And with attempts to buy out tequila brand leader Jose Cuervo, Diageo is trying to keep rivals Beam (NYSE: BEAM  ) and Brown-Forman (NYSE: BF-B  ) at bay.

For retirees and other conservative investors, Diageo's valuation is a bit rich, and growth has started to slacken somewhat. After a very nice run for the stock, it may be time to let Diageo take a rest before seriously considering adding it to a retirement portfolio, despite its favorable qualities.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

Add Diageo to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services have recommended buying shares of Diageo, Boston Beer, Beam, and Molson Coors. 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 Fool has a disclosure policy.


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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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