'Diageo (NYSE: ), the world's largest spirit maker, offers a solid and safe dividend, as well as the potential for strong capital appreciation," says Louis Basenese.
The senior analyst for the prestigious The Oxford Club suggests, "Moreover, investors can also prepare for a US dollar decline by buying these shares." Here's his bullish outlook.
'Headquartered in London, roughly 70% of the company's sales come from outside the United States. So any dollar dip will increase the value of our ADRs.
'Moreover, management concedes that positive currency tailwinds in the other countries where Diageo sells spirits will help the company easily grow earnings by double digits this year.
'Sound dollar hedge? Double-digit earnings growth? Those two factors alone justify an investment. But it gets better. Diageo also sports top-notch fundamentals...
'As the world's biggest spirits company, it operates in over 180 countries, which provides notable benefits in terms of economies of scale and an unparalleled distribution network.
'It's also the world's best spirits company, with eight of the world's top 20 brands. This leadership gives Diageo the upper hand in the hottest growth sector: emerging markets. Consumers, with newfound disposable income, flock to the aspirational qualities of its brands.
'Look no further than the most recent results for proof. Over the last six months, emerging markets in Africa and Latin America grew by 11%, outstripping all other areas.
'Another plus? Diageo spins off gobs of cash — $2.5 billion in the last year alone. Yet, management still sees room for improvement. In fact, it's rolling out another restructuring effort to increase the efficiency of the business.
'At the end of the day, we benefit from the strong cash flows because it allows management to buy back shares in the open market and increase the dividend.
'Speaking of the dividend, Diageo yields a respectable 3%, almost on par with 10-year Treasuries. I'd argue that investing in Diageo for the yield alone is a safer investment than Treasuries.
'The fact that shares trade on the cheap — at 12.5 times earnings or roughly 30% below its historic P/E ratio — only sweetens the opportunity. On top of a solid and safe dividend, we get the potential for strong capital appreciation."
'If you're still not ready to raise your glass and purchase shares, consider this: The latest academic studies prove investing in so-called vice stocks like Diageo pay — consistently. In two separate studies out of Yale and Princeton, researchers proved vice stocks outperformed virtuous ones in 35 out of 37 years.
'We're up 18% since our entry about three months ago. Shares still have a long way to go before reaching anything close to fair value, so keep buying.
If you're wondering why I prefer hedging against a dollar decline with stocks, it's simple. Buying companies with significant international exposure allows us to profit in two ways — from the currency hedge and the success of the underlying business. Or, more plainly, it increases the number of ways we can profit, which is never a bad thing."
