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

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

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

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.