The great thing about exceptional profit margins and a robust cash flow margin is that it gives you ample time and opportunity to work out any problems that appear in the system. To wit: British liquor company Diageo (NYSE:DEO), a Motley Fool Income Investor recommendation, has had to deal with new legislation in Europe, its exposure to its former subsidiary Burger King, its ownership stake in General Mills (NYSE:GIS), a major merger in the industry, and ongoing competition, yet it still had a decent year.
While revenue climbed only 2% for the year, operating profit rose by 7%. Revenue was driven pretty much by volume, as the company increased its unit volume by about 3% for the year. Results were strongest in North America, where sales rose 6% and operating profit climbed 11%, and weakest in Europe, where sales dropped 2% and operating profit rose 3%.
Let's look at some of the signature brands: Guinness volumes fell 2%, Smirnoff vodka rose 3%, Captain Morgan rum climbed 10%, and Bailey's was up about 1%. Sales in the ready-to-drink category, though, were soft -- volumes fell 3% overall, led by a 26% volume drop in Europe, a result the company attributed partly to recent legislation in various parts of Europe.
The company reported essentially flat free cash flow from the year-ago level, at about $2.6 billion. Looking ahead, management certainly intends to put this cash flow back in investors' pockets. In addition to raising the dividend by about 7%, management proposed a share buyback for fiscal 2006 that could total as much as $2.5 billion.
While it can be dangerous to just assume that a successful company or brand will be successful forever (Woolworth, anyone?), it's hard not to like the economics of the liquor business. People have always liked to drink, still like to drink, and probably always will like to drink, and as the largest player in the space, Diageo certainly has some appealing leverage going its way.
Those who read my work regularly know of my affection for the American-Polish alcohol company Central European Distribution (NASDAQ:CEDC), but that company is riskier and pays no dividend yet. Elsewhere, Constellation Brands (NYSE:STZ) and Brown-Forman (NYSE:BFB) might be stronger earnings-growth stories, but they, too, don't offer the payout of Diageo. At the end of the day, money's money, and there's nothing wrong with building wealth with dividends.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
