U.K.-based Diageo (NYSE:DEO), the world's leading premium drinks company, may be one of most appealing businesses in the U.K. today. This $43 billion enterprise currently trades for $69 a share, commands a forward P/E ratio of less than 14 and pours out a 4.2% dividend yield at that. Yet despite these signs often associated with slow-growth, boring blue-chip type names, Diageo is anything but.

IN PICTURES: 20 Tools For Building Up Your Portfolio

Diageo's diverse portfolio of offerings is a perfect blend of global diversity and concentration. While spirits is the anchor for Diageo, the company generates 22% of its sales from beer, an amount significant enough to make Diageo a global player in the beer market. The company's beer business highlight is its global brand Guinness. Diageo's two biggest beer markets are Europe and Africa, but the company also has a meaningful presence in North America and Asia. (For more, see Beeronomics: Factors Affecting Your Pint.)

A Premium Choice
In terms of premium drinks, Diageo tops the list, easily eclipsing Brown-Forman (NYSE:BF-B), Bacardi, and Pernod. Diageo boasts the world's leading scotch, tequila and liqueur. Some of the most popular names in the spirits business - Smirnoff, Captain Morgan, Crown Royal, and Jose Cuervo - all fall under the Diageo umbrella. (For more, see Parched For Profits? Try Beverage Stocks.)

A Toast to Success
For a company of its size and depth, Diageo's valuation is attractive. It's been commonly accepted that products like spirits will do well in all economic climates. While the global economic downturn has affected all companies, Diageo was able to deliver 4% organic growth along with a 10% lift in earnings per share in 2009. The beverage business can be a very high cash-generative business if managed properly. One need look no further than Coca-Cola (NYSE:KO) over the past decades for proof.

Diageo has been no different. Since the company's birth in its present form in 1997, Diageo has returned over $25 billion, adjusting for exchange rates, in the form of share buybacks and dividend payouts, an amount that equates to over half of today's current market cap. The company boasts an operating margin of over 20% and generates nearly $2 billion in free cash flow each year. For fiscal 2009, return on invested capital, the ultimate measure of value creation, was nearly 15%, well above the company's current cost of capital.

An Attractive Valuation
Despite a stronger balance and higher margins, Diageo's valuation is a discount to bigger rival Anheuser-Busch InBev (NYSE:BUD), which currently trades for nearly 23 times earnings against 17 for Diageo. Factor in the 4% yield versus nothing for BUD, and U.K.'s Diageo may be the most attractive spirits business in the space today. Time will tell, but given the company's superior financial stability and record of strong operating results, investors may be toasting to Diageo's shares in the not too distant future. (For more, see Guard Your Portfolio With Defensive Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Stock Analysis

    6 Risks International Stocks Face in 2016

    Learn about risk factors that can influence your investment in foreign stocks and funds, and what regions are more at-risk than others.
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  7. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  8. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
  9. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  10. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  1. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
Trading Center