6. Diageo plc (NYSE:DEO)
Number of Hedge Fund Holders: 30
Prevatt Capital’s Stake: $23,054,700
Diageo plc (NYSE:DEO) produces, markets, and sells alcoholic beverages. It is placed sixth on our list of top stock picks of Prevatt Capital. Hedge funds are bullish on Diageo plc. (NYSE:DEO) as the firm has significant market presence and consumer loyalty due to a lot of strong brands, like Johnnie Walker, Guinness, Smirnoff, and Baileys. The firm is also well-positioned to benefit from the trend towards premiumization in the alcohol industry. Diageo plc (NYSE:DEO) is a typical Tepper stock, offering stable dividend payouts, a healthy return on equity, and has a high operating margin.
Despite having a high level of debt, Diageo plc (NYSE:DEO) remains a value champion. The earnings of the company are estimated to grow at nearly 5% and the revenue at more than 3% per year over the next three years. The company has a growth history to back up these numbers. In the past five years, earnings have grown 7% every year. The dividend yield of Diageo plc (NYSE:DEO) is above 3% with a stellar payout history. Compared to peers in the alcohol space, the stock is trading at a reasonable value for shrewd investors who understand the value proposition of the firm.
In its Q4 2023 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and Diageo plc (NYSE:DEO) was one of them. Here is what the fund said:
“One of the areas that hasn’t participated in the year’s rally has been consumer staples. We identified two staples stocks that meet our three margin of safety criteria (attractive business economics, sound financial condition and attractive valuation), purchasing Diageo plc (NYSE:DEO) and Kerry Group.
Diageo is a global leader in alcoholic beverages with an impressive collection of brands across spirits and beers. The company’s portfolio of over 200 brands provides diversification and allows it to meet consumer trends. A key focus for growth has been premiumization, and today, Diageo’s portfolio is now more heavily weighted toward premium segments. Shares are trading at multiyear trough multiples on fears of growth normalizing after a COVID-induced bounce and premiumization headwinds as some markets are showing consumers trading down to value alternatives. In the near term, margin expansion will likely be constrained, but the company generates meaningful free cash flow and returns it to shareholders through dividends and share repurchases. Over the past five years, Diageo generated £12 billion FCF and returned £16 billion to shareholders. Although spirits are more cyclical than other staples, the company’s growth prospects are better long term, and we believe the current situation has provide us an attractive investment opportunity.”
