Brown-Forman and its rival Diageo

When constructing a diversified dividend stock portfolio that will churn out an ever-growing passive income stream over time, it’s vital to focus on well-established businesses with a durable and profitable economic moat, iconic brands, and a compelling track record of robust cash generation as well as a sound financial policy and catalysts for future growth.

Many of these businesses can be found in the consumer staple sector with great dividend stocks like Nestlé, PepsiCo or The Coca Cola company.

Two very interesting businesses to have a look at are US-based Brown-Forman and its British peer Diageo.

Company Snapshots

Brown-Forman the US Whisky giant

The Brown-Forman Corporation is one of the largest American-owned spirits and wine businesses. It’s a company with a long tradition, having been around for 150 years.

The company stocks are publicly traded but the business is family-owned and controlled. Roughly 40 members of the descendants of the founder George Garvin Brown control more than two-thirds of the voting shares.

Brown-Forman has a very focused portfolio of alcoholic brands built around their two flagships Jack Daniels – the iconic Tennessee-Whiskey – and Old Forester, the brand of Kentucky Straight Bourbon Whiskey produced by the Brown-Forman Corporation.

Jack Daniels is the largest global premium spirits trademark and only really challenged by the Scottish Whisky brand Johnny Walker, owned by Diageo.

The Brown-Forman Corporation has strengthened its global presence in the last forty years. Currently, around 50 % of revenues are derived from the US market, the rest is made outside America.

Brown-Forman shows conservative financial policies with an A1 Moody’s Credit Rating and strong liquidity.

The company has been paying out dividends since 1944 and has been increasing the payout since 1984, making Brown-Forman a Dividend Aristocrat.

Brown-Forman’s strong profitability on the back of iconic premium brands (Jack Daniels, Forester) which are growing fast, led to a consistent trend in form of mid-to single-digit growth to the top and bottom line.

So while Brown-Forman has healthy operative margins (percentage of revenue that a company retains as income after expenses) above 30 % and predictable free cash flow through economic cycles despite sensitivity to discretionary consumer spendings, the company is facing pressure on its margins due to growing competition. Further building up its strong distribution networks also requires heavy investments putting pressure on the bottom line.

Brown-Forman has over 40 brands but as said it’s highly focused on its two flagship brands. Its net sales of USD 3.5 Billion and an operative income of above USD 1 Bn. are likely to continue to grow, but the company’s relatively small scale (compared to other competitors, in particular, Diageo) and limited product diversification with a meaningful concentration of sales and profits from the Jack Daniel Brands Family are certain factors to bear in mind when it comes to investing in that company.

Now, let’s turn to Brown-Forman’s largest competitor.

British Diageo, one of the worlds largest distiller

When it comes to Diageo, few know the company name but we all know its amazing brand portfolio with

  • Johnny Walker
  • Vodka Smirnoff
  • Baileys
  • Captain Morgan Rum
  • Don Julio
  • Guiness Beer

just to name some of them.

It’s just incredible to see such an extensive portfolio of alcoholic brands. It’s also interesting to note the Joint Venture between Diageo and Louis Vuitton Moet Hennessey with regard to iconic French champaign brands, wines, and spirits.

The name of the alcohol giant Diageo is an invented one, it consists of the Latin word “dies” which means “day” and the Greek-rooted word “geo” meaning “world”. So, it’s very obvious that a brand consultancy firm has been in charge of that, as far as I know, Diageo should make reference to the company slogan “Celebrating Life, every day, everywhere.”

The history of the company is an interesting one. Diageo was formed in 1997 through a merger between the Guinness Brewery and Grand Metropolitan. So with the iconic beer maker Guinness, the history goes back to 1759, when the Dublin-based brewery started. The Grand Metropolitan was British leisure, manufacturing, and property conglomerate.

So, Diageo having been formed in 1987 is not a Dividend Aristocrat such as Brown-Forman. Since 1998 it has raised its dividend and my guess would be to see that company hiking its shareholder distribution going forward.

Diageo’s growth trajectory has been impressive, the business has robust Free Cash Flows and an incredible economic moat. Diageo has an A3 Credit Rating from Moody’s, showing solid financials.

With sales of roughly USD 14 Bn and an operating income of roughly USD 2.5 Bn, Diageo is much larger than Brown-Forman but also has lower operating margins, ranging from 20 % to 25 %. Diageo has a different product portfolio and another strategic approach with a strong focus also on beer brands that have lower margins than spirits.

Well-established beer brands have made very lucrative investments in the past but of course, consumption can be more volatile than in the case of spirits. Guinness also has some pressure from competitors such as Heineken and Anheuser-Busch AnBev.

Thoughts on Brown-Forman and Diageo stock

Let’s first have a look at the stock price dynamic with regard to Brown-Forman.

It becomes immediately clear that Brown-Forman has been one of the exceptional wealth creators among publicly traded companies controlled by a family. There is some sensitivity to discretionary consumer spendings, but still, you have seen a relatively smooth stock price chart moving up quite nicely, in tandem with the business fundamentals. Now taking into account more than 35 years of consecutive dividend growth it has been a compelling investment case.

Brown-Forman stock always looks expensive. Personally, I cannot remember having seen shares of that business below a Price-Earning-Ratio (PE-Ratio) of 25. But still, when you look at the stock chart, there is some volatility which is always welcome when considering taking a stake in a wonderful business at a fair price. For instance, in March 2020, when the COVID-19 pandemic hit the world and pubs, restaurants had to close around the globe and international travel came to a temporary standstill, the Brown-Forman stock came down by 25 %. These are the kind of rare occasions where quality at a fair price can be found.

Now let’s have a look at the Diageo stock price movements over time.

March 2020 amid the COVID-19 pandemic has been symptomatic for the Diageo stock price. We have a broadly diversified conglomerate with iconic alcohol brands but also a strong exposure to beer revenues. So when pubs and restaurants closed, the Diageo stock took a hit. Diageo also has a stronger reliance on travel retail and on-trade sales channels than Brown-Forman. It took Diageo a while to adapt, but as soon as the world started re-opening, the stock literally shot up.

The Diageo stock shows very nice wave movements on an upward trend. From time to time you can find very nice entry prices with a PE-Ratio ranging at around 20 with a starting dividend yield of 3 % or even higher. Currently as of writing the dividend yield is at 2 %, so the stock looks historically rather expensive.

There is no need to rush into taking exposure in either one of these two excellent businesses. The stock market through volatility will provide plenty of opportunities in the future. Just put businesses you like on a watchlist and be patient. The next buying opportunity could be showing up even sooner as you might think.

You are responsible for your own investment and financial decisions. This article/video is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

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