Diageo Pours Double Shot of Earnings Growth and Diddy's Tequila

NEW YORK (TheStreet) -- The global beverage giant Diageo (DEO) has teamed with the international rap star Diddy to purchase DeLeon, a luxury brand of tequila produced in the Mexican town of Purisima del Rincon. Diddy (a.k.a. Sean Combs) and Diageo are hoping to replicate the success of their Ciroc vodka venture, which resulted in a 40-fold increase in sales as Diddy fronted for Diageo's label.

For long term investors, Diageo offers a cocktail of earnings, sales, and dividend growth.

Based in London, Diageo is the world's biggest distiller. It sells such well-known brands as Guiness, Ketel One, Johnie Walker and Captain Morgan in more than 180 countries.

Both sales and earnings growth are improving for Diageo. Over the past five years, sales growth was 7.2%. On a quarterly basis, sales growth is now at 16.9%.

Earnings-per-share growth is showing the same bullish pattern. At present, earnings-per-share growth is 34.8% on a quarterly standard. For the year, it is 27.5%. That is a significant improvement from the earnings-per-share growth rate of 11.50% registered for the last five years.

Overall, Diageo reports 28% growth for "profit attributable to parent company's equity shareholders" from 2012 to 2013. The best performing brand in terms of sales growth has been Buchanan's Scotch whisky, with a 26% net movement. Next is Crown Royal, with a 17% jump. Bushmills and Tanqueray both posted 12% increases in sales. The spirits category had the highest sales growth at 9%.

Much of that sales growth has come from a focus on the expanding consumer class in emerging market nations. A report from McKinsey predicts that one billion people will join the global consumer class by 2025.

Diageo has toasted the newly affluent in Brazil, China, India and other developing nations with an increase in sales of more than one-third. At present, emerging markets account for 42% of sales. That is up from 30% in 2004. According to Ivan Menezes, its Chief Executive Officer, Diageo expects more than half of its revenues to emanate from countries other than Great Britain and the United States in the years ahead.

The shareholders of Diageo should look forward to rising dividends for the future, too, based on the history of the company.

Diageo now pays a dividend of around 2.96%. That is about 50% higher than the S&P 500's average of just under 1.9%. The five-year dividend growth rate for Diageo is 2.35%. With earnings growth so much higher than dividend growth, Diageo can easily afford future dividend increases.

Plus, the investment community is bullish about the future of Diageo.

Now trading around $128.20 a share, the mean analyst target price for the next year is $148.65, according to Finviz.com. The composite analyst rating for Diageo is a 1.30, which is very positive; on the Finviz scale, 1 is the best and 5 is the worst. The short float is a minuscule 0.08%, so not too many are betting that the stock price of Diageo will fall.

With sales growing, earnings increasing, and a history of dividend hikes, long term investors should gain from a rising total return from Diageo into the future.

Investors will drink to that.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Jonathan Yates has written for numerous publications including Newsweek and The Washington Post. He is a former general counsel for a publicly traded corporation. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate. He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.

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