Consumer staples often are defined as breakfast cereals, dish soap and toilet paper. These are naturally defensive plays, as the top stocks have entrenched brands and strong baseline demand in any market environment, even if growth is hard to come by.
But one piece of the staples market worth exploring for both stability and growth is the alcoholic beverages segment. There is big emerging-market demand for beer and spirits thanks to a growing middle-class consumer segment, and continued consolidation in Western markets means rock-solid stability for the long-term.
If you want to get into this industry, consider these three alcohol stocks:
Mega-brewer Anheuser-Busch InBev (NYSE:BUD) is not just a stable staples stock; it is one of the biggest and most entrenched companies in the world. BUD is a $150 billion company — larger than retail giant Amazon.com (NASDAQ:AMZN) or oil powerhouse BP (NYSE:BP) measured by market capitalization. It does about $40 billion in annual revenue across more than 130 countries, and it’s the largest brewer in the world by several metrics.
In fact, it’s so huge that its proposed buyout of emerging-market beer stock Grupo Modelo (PINK:GPMCF) is running into trouble because of antitrust concerns. Anheuser-Busch InBev is wrangling with regulators over the $20 billion purchase plan, and has even included a provision to essentially give away some beer brands to a competitor, hoping it will alleviate criticism that the brewer would be so large it would be anti-competitive.
Despite the size, though, BUD is flying high. The stock is up 43% in the last year to lap the S&P 500 almost four times. It’s also up 63% since January 2011 to triple the S&P.
The dividend isn’t grand at just 1.7%, but the payout ratio is low and cash flow is strong, so it’s likely that after the big expenses of recent acquisitions, cash will start flowing to shareholders in earnest.
Side note: Constellation Brands (NYSE:STZ), which would benefit from BUD ceding some of its U.S. operations for Corona and Modelo, is another interesting play — but since it popped 30% in one day on renewed hope the deal would go through, it seems too hot to handle right now.
Beam Inc. (NYSE:BEAM) is a spirits purveyor and has been making headlines recently for an ill-advised (and eventually reversed) move to cut the alcohol content in its Maker’s Mark bourbon. But don’t believe the hype — it would take some serious missteps to damage the brand power at Beam with its lineup of Courvoisier cognac, Sauza tequila and of course its namesake Jim Beam bourbon.
Beam stock is a little frothy right now with a forward P/E of over 20; with only single-digit growth forecasts for earnings and sales this fiscal year, it could be overvalued. But I like Beam on a pullback because of its smaller size and thus its ability to see material gains from emerging markets growth in the long-term as it gains market share. Bigger competitors like Diageo (NYSE:DEO) — which is more than seven times the size in both market cap and revenue — have to put up much bigger numbers to hit the bottom line.
There are risks, of course. For instance, Beam reported that Asia Pacific/South America sales actually fell in the most recent quarter as the company repositions its business and deals with corruption charges relating to its India unit. But this could provide a buying opportunity.
Also, I recently highlighted Beam as a potential buyout target thanks to its powerful brands but relatively small size compared to heavyweights like Diageo. That would produce an instant pop to shareholders, but it’s worth noting that M&A chatter has been bandied about for years since BEAM split from Fortune Brands in 2011. Nothing has come of it yet, so don’t buy just for the buyout potential.
Speaking of Diageo, it’s hard to go wrong with this spirits heavyweight. Its brands include top sellers Smirnoff vodka, Johnnie Walker whisky, Baileys Irish Cream and Guinness, stout to name a few.
Just as Anheuser-Busch InBev has rolled up the brewing space lately, DEO has been on an acquisition tear. In 2011, it purchased Turkish liquor company Mey Icki for more than $2 billion. In 2012 it did another $2 billion deal to acquire a majority stake in India’s United Spirits. And who knows what’s next for Diageo in 2013.
DEO pays a respectable 2.3% dividend despite this big spending. Furthermore, shares have soared 60% since January 2011 to nearly triple the S&P 500 in the same period, and Diageo stock is up 25% in the last 12 months.
Fundamentals are strong, too, with a roughly double-digit sales jump in 2012. Revenue should grow at a similar clip in 2013, but earnings are forecast to grow over 30%. And with a forward price-to-earnings ratio of about 19, it has one of the lower earnings multiples in the fast-moving spirits segment.
If you’re looking for scale and stability, it’s hard to go wrong with DEO stock.
- Spirits sales were up again in 2012 — led by a 22.5% jump in Irish whiskey volume. (USA TODAY)
- Of course, not all emerging markets are in growth mode … Egypt wants to ban drinks altogether. (The Washington Times)
- How whiskey’s great history (and tariff reductions) fueled sales. (Fred Minnick)
- Personally, I like my whiskey without anything … but I do like a good dry manhattan every once in a while. (iDrink.com)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.