Why Jim Cramer is sweet on Diageo plc

Diageo Baileys
Diageo Baileys

Jim Cramer the American television personality, former hedge fund manager, and best-selling author is the host of CNBC's Mad Money and a co-founder of TheStreet, Inc. Right now he reckons one of the best potential investments anywhere in the world is Britain's own Diageo(LSE: DGE), the premium drinks supplier.

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A set of circumstances has come together to provide investors with three ways to win with Diageo, according to Cramer. I think he's right, and I've also been a long-time fan of Diageo's defensive, consumer goods business model with its cash-generating qualities.

A quality outfit

Diageo's well-known drinks brands such as Johnnie walker, Smirnoff, Captain Morgan and Guinness front powerful cash-generating consumer products that command customer loyalty. People rarely forego their favourite tipple whatever the economic weather, which results in dependable cash flows for Diageo, making the business one of the most defensive on the stock market. Such is the firm's success that Diageo has risen to be the world's largest maker of spirits.

Enter Jim Cramer, who has lately been concerned with the possibility that the Federal Reserve could soon raise interest rates, which could dampen growth in the US economy. He's been hunting for high-quality companies that can withstand a slower growth environment in America and his attention has settled on Diageo.

Cramer says: "I am feeling increasingly like Diageo is an idea whose time has come. Right now this company is giving you not one, not two, but three potential ways to win, and I bet it could have a lot more room to run."

In many ways, Cramer seems late to the game because Diageo's shares are up around 174% over the last seven years and investors will also have enjoyed a steady stream of rising dividend payments to augment their capital gains. However, Cramer's three reasons for buying the shares now are compelling.

Three ways to win with Diageo

Cramer's first potential payoff is that Diageo is based here in the UK. The Brexit vote caused the value of the pound to plummet against other currencies such as the US dollar and the euro due to fears about Britain's economic outlook. A weak currency makes imports more expensive, but it's good for exporters because it makes products more competitive overseas. Therefore, the plunge in the pound is great for Diageo, because the firm sends its products all over the world, particularly Scotch, which can only be distilled in Scotland to be authentic.

The second factor is a rebound in China's fortunes, he reckons. Casino and 'vice' stocks, such as Diageo's, were affected when the Chinese government cracked down on corruption during 2014.

However, Cramer noticed that the Macau gambling business picked up in August for the first time in two years, so he reckons China's anti-vice stance is softening, which could mean Diageo's business could pick up again in China.

The third big reason Cramer likes Diageo is because it could be a potential takeover target. After consolidation in the liquor sector in the past few years, he thinks there's a good chance Diageo will fall into another firm's crosshairs, perhaps, he speculates, those of serial acquirer AB InBev.

I reckon Jim Cramer's shorter-term conviction adds weight to an already compelling longer-term defensive growth story with Diageo. At today's 2,188p share price, the firm's forward price-to-earnings ratio runs around 21 for year to June 2017 and the forward dividend yield sits just under 3%.

What to do next

Diageo is a quality firm and as such rarely sells cheaply. However, the defensive nature of the company's steady growth and reliable dividend payments has earned it a place as one of The Motley Fool's Five Shares To Retire On.

If the next seven years prove as lucrative as the previous seven, investors will do well with Diageo from here. The other four firms in the report also have compelling economics that could drive a worthwhile long-term return for investors. You can download the Fool's research free of charge right now and find out the identities of these four firms. Click here.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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