There is something about the words "Scotch whisky" and "Africa" that
conjures the mental image of Sir Henry Morton Stanley and Dr. David
Livingstone's 1871 meeting in the wilds of Tanzania. Stanley was a reporter
who went to Africa in search of the missing missionary and who, upon finding
him, greeted him with the now famous "Dr. Livingstone, I presume?" I know
it's absurd, but I've always pictured Livingston inviting Stanley into his
grass hut, tastefully decorated with Victorian furniture, and offering him a
tumbler of Johnnie Walker Blue Label. For two gentlemen far away from home,
anything less would be uncivilized. That didn't happen (or it wasn't
recorded, at any rate), but it's highly likely that a meeting today between
two persons of note in Africa would involve a Diageo (NYSE: DEO ) product.
According to The Economist , "As Africans grow richer, they drink more
Scotch." Sales of Scotch whisky rose to $147 million in the first six months
of 2011 an increase of 34% over last year and Diageo's Johnnie Walker is
responsible for much of this. Johnnie Walker sales doubled in East Africa last
year and are on track to do even better in 2011. There is every reason to
believe that this level of growth is sustainable. Again, returning to The
Economist , "Each Nigerian sips only a third of a shot each year, on average.
A typical Frenchman downs 40, even though it goes badly with wine." Given the
lower average incomes south of the Saharan sands, we can't expect Africans to
drink Scotch at European levels anytime soon. But I do expect Diageo to enjoy
high growth in the region for the foreseeable future. Africans like East
Asians, Arabs, and Latin Americans are status-conscious and live in a
hierarchical society. As The Economist explains, "In Africa, with its
patronage culture, whiskies with distinctive labels should do well. Johnnie
Walker's labels make it abundantly clear how much a customer has spent. Red
Label is the cheapest. Black is pricier, followed by Green, Gold and Blue.
Beyond Blue is King George V, which sells for more than $500 a bottle." And
it's not just for gents at the country club. "Criminals in South Africa buy
it to prove they are successful criminals." I continue to recommend Diageo as
a long-term holding. The company sits at the intersection of several powerful
macro themes, any one of which would be attractive in its own right: Diageo is
an Emerging Markets Lite investment, getting a third of its sales from
up-and-coming emerging markets. As a seller of alcoholic beverages, DEO is a sin
stock , with all of the great investment attributes that implies. Diageo is
conservatively financed and at no realistic risk of financial distress. Diageos
clientele tend to have higher incomes and are less affected by the sluggish
global economy. DEO pays a high and growing dividend with a current yield of
4.3%. If you don't own shares of Diageo already, I recommend you buy them now.
Use any weakness as an opportunity to accumulate new shares. If Europe plunges
into a full-blown financial crisis on the heels of a Greek default, I would
expect all European stocks, even those of non-Eurozone members like the U.K., to
suffer some pretty horrendous volatility. This could present an incredible
opportunity for investors with a little cash on the sidelines. Diageo is a
recommendation of the Sizemore Investment Letter. Charles Sizemore holds shares
of DEO both personally and in client accounts.
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