Private Investor: Bingeing on booze is bad for you - but it's good for profits
Saturday 15 January 2005
Just my luck. No sooner than I do the sensible thing and buy into
Diageo, a nice steady share with reasonable prospects for capital growth and dividends, than a German broker goes and disses the company.
Just my luck. No sooner than I do the sensible thing and buy into Diageo, a nice steady share with reasonable prospects for capital growth and dividends, than a German broker goes and disses the company. Actually, I don't have anything against German brokers as opposed to any other kind of brokers. No, what has got my goat is the decision to downgrade Diageo from "add" to "hold".
The broker's notion is that the shares are due to stall, that the re-rating of drinks companies and their outperformance of the wider market is now at an end, and that next month's first-half results will be the point at which to take stock of the future of Johnnie Walker, Guinness and Smirnoff sales.
While Dresdner Kleinwort Wasserstein believes that trading in America remains buoyant, it also thinks evidence of US market share gains remains uncertain. It is also sceptical about margin growth, with lower spending on advertising and marketing. So I bought Diageo at about 750p and the next day it slipped by 10p. No great shakes in the big scheme of things, but it is remarkable that a review by one broker, no matter how well respected, can move a company's shares quite so decisively. I suppose it explains why "investor relations" are so important and why financial public relations seems to be such a lucrative trade. But it also seems like a very short-term perspective. I know someone of my age and weariness ought not to be shocked or perturbed by this sort of thing, but I do wonder.
In any case, I'm quite content about my renewed interest in Diageo, which I had pretty much sold out of, after a long bull run and some excellent dividend performance. Over a period of some years, I had opted for Diageo's dividend reinvestment plan and I was well rewarded. I wrote last week about how well an investment in human vice can reward the average investor; and while I agree with the Dresdner brokers that the long bull run has probably petered out, I would have thought that Diageo still had steady prospects.
For some investors, steady stock is not the thing they need at all: those with an unusual appetite for risk, or the few who want to get going in their twenties or thirties, say, who would be wise to focus on long-term capital growth rather than on income.
For myself, I needed to balance some adventurous punting with something more reliable. By the way the nuttiest of those, Matrix Communications, has slipped back a little after its recent extraordinary run (up 50 per cent in a month or so). Even so my drinking partner, who alerted me to its potential and has put what I consider to be a rash figure into the shares, has added to his holding. He has nerves of steel. I needed a drink after all that excitement.
Anyway, back to the story. The best short-term boost for Diageo is the growth in the drinks market, and here there are at least two good signs, as far as the UK market is concerned. First, there is the imposition of the smoking ban on pubs which might well increase the off-licence trade, as people buy to consume at home. Then, and more powerfully, there is the prospect of liberalisation of the UK's licensing laws. Personally, I don't buy the idea that when the licensing hours change, we'll all turn into moderate Continental-style drinkers, complete with café culture and Left Bank intellectuals.
No, what will almost certainly happen is that the normal three-hour British binge drinking session will be stretched into a five- or six-hour marathon, with all the predictable consequences that will have for anti social behaviour, policing and the state of our city centre pavements on a Sunday morning.
But one's personal prejudice should rarely stand in the way of making a good profit, so Diageo joins Scottish and Newcastle, Sportingbet, McDon- alds and Shell in your investor's unethical portfolio. And before you ask, I did give money to the tsunami appeal.
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