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Diageo And Brown-Forman: Like Them Both But For Different Reasons

Deep Value Ideas profile picture
Deep Value Ideas


  • Diageo plc and Brown-Forman Corporation, the two famous alcoholic beverages producers, are both market leaders in certain areas. Because of their solid and reliable earnings, their stocks never seem to be cheap.
  • In this detailed comparative analysis, I will discuss the two companies' businesses, growth prospects, and profitability.
  • I will also compare their balance sheets, highlight key risks, and evaluate dividend track records and reliability.
  • Finally, I will value the two companies' stocks (both are down nearly 20% from their 52-week highs) and outline my own positioning and next steps.

Feuer- und Eiskonzept-Design mit Funke. 3d-Illustration.

Apisit Suwannaka/iStock via Getty Images


As an investor who greatly admires Peter Lynch and his strategies, I always wonder how many investment cases in Diageo plc (NYSE:DEO, OTCPK:DGEAF) and Brown-Forman Corporation (NYSE:BF.A, NYSE:BF.B) have their origins in a bottle

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Deep Value Ideas profile picture
Tired of effortful investing strategies with uncertain prospects? As a former deep value investor, I learned to appreciate the benefits of a dividend-focused value strategy several years ago. My strategy puts an emphasis on capital preservation and steadily growing income. I write primarily about stocks I hold in my diversified dividend stock portfolio, which emphasizes high-quality value stocks that offer meaningful growth and long-term safety. Feel free to reach out to me via direct messaging here, on Twitter, or through the comments section of one of my articles. Hit the “Follow” button if you'd like to join me on my journey to financial independence.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DGEAF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The content is for informational purposes only and may not be considered investment advice. It is not my intention to give financial advice and I am in no way qualified to do so. I cannot be held responsible and accept no liability whatsoever for any errors, omissions, or for consequences resulting from the enclosed information. The writing reflects my personal opinion at the time of writing. If you intend to invest in the stocks mentioned in this article – or in any form of investment vehicle generally – please consult your licensed investment advisor.

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Comments (34)

Goose Hollow Investments profile picture
Excellent article. Very thorough analysis and well-written.

I agree with your conclusions and have been adding to my DEO holdings on the recent earnings sell off. However, I also recently added (marginally) to my BF holdings on its own pullback. It has always traded at a premium and, though far from a bargain, is one I’ve always been glad I picked up after sell offs.

One factor I would add to BFs list of advantages is a longer runway for growth. As you point out, they’re foreign exposure is quite limited (I believe that in addition to Poland, Brazil, and Mexico, the UK and Australia also account for a meaningful slice of foreign sales). While DEO’s global footprint is enviable, and a lot of room exists for sales and margin growth, BF is still in the very early innings of international expansion. Of course, they need to execute, but with their quality products/brands, the cache of American whiskey, and the brand awareness they garner through duty free sales, I fully expect BF to make inroads into other markets. The recent removal of EU tariffs on American whiskey should help with margins and facilitate the case for further foreign investment as well.

Thank you again for the article, I look forward to reading more of your work!
Deep Value Ideas profile picture
@Goose Hollow Investments Appreciate the motivating feedback, thanks a lot for reading, and for having hit the follow button.

Thanks also for your opinion on DEO and BF and the elimination of EU tariffs on American whiskey. I agree that BF should be able to grow increasingly overseas, and in particular their JD franchise is very obvious in the duty free area, but of course that could be a more subjective perception of mine.
Excellent article. Own both but you identified all reasons I used to buy and more. Looking ahead DEO international sales persuasive, despite some greater risk.
Deep Value Ideas profile picture
@bulldogbob Thanks a lot for the positive feedback, glad you liked the article.
Although Brexit is undoubtably very damaging for the UK economy - it if anything is a net positive for Diageo shares :
This is firstly because sterling weakness (an inevitable recurring result of Brexit) translates the firm's heavy dollar earnings into more sterling and more sterling dividends. In this sense, Diageo also offers UK investors a painless way to help safeguard their valuable savings from the foolishness of their own politicians. Increasingly, UK funds are concentrating on a handful of global earners - like Diageo, Unilever, Astra Zeneca, Shell.
Deep Value Ideas profile picture
@mark sulli Thanks, appreciate the comment.

In principle, yes, Diageo should benefit from a weaker British pound from an earnings perspective, but it is important to also review the cost side of the equation. I cannot estimate with reasonable accuracy Diageo's exposure to imported raw materials. I don't think it's an overly significant amount, but what I am trying to say is that both sides of the equation need to be considered.

Finally, you are obviously correct in saying that investing in stocks of solid companies which trade and pay dividends in the "home currency" are a great way to protect purchasing power and help maintain a standard of living. In my opinion, this is one major reason to invest in the first place.

Personally, I have chosen to maintain an internationally diversified portofolio, i.e., intentionally assuming a currency risk. Take the example of the British pound from the perspective of a UK investor - if the currency continues to weaken, imports will get more expensive and thus living expenses that relate to imported goods.
I note : “Personally, I also maintain a globally diversified portfolio from a currency perspective, so I actually welcome a portion of my dividend income being paid in British pounds …” Which brokerage do you use to receive dividends in foreign currency?
Deep Value Ideas profile picture
@JoeThaba I am pretty sure that the dividend payments are (always*) received in the currency of the country where the company is domiciled. Your bank/broker typically converts it at the relevant exchange rate. That said, many banks offer foreign currency accounts, at least here in Europe but I doubt that the U.S. is any different.

*) For example, Unilever is a bit of a special case as it changed from a dual listing (NL/UK) to a UK-only listing. I still receive my dividends in Euros though.
tizod profile picture
My comment would be both are still overvalued and I'd await a pullback. Gamble yes, but prudent to ensure growth is a maybe sideways economy: liquor will sell but valuations will come down.
@tizod My thoughts exactly. look at the fast graphs charted valuations against the ubiquitous 15 PE and look at the recession (1.5 year long) in 2007-2008. . . , two picture-perfect (fast graphs) examples of Brand Managed companies selling to the addicted (status, or alcohol, or both).
Deep Value Ideas profile picture
@tizod That's a fair assessment. Patience will be rewarded here, I am confident. There is quite a bit of hot air esp. in Brown-Forman, but also in Diageo. @Hugh Arhue it would likely take a very severe downturn for the stocks to fall to a P/E of 15, but of course never say never.
Excellent work. Thanks!
Deep Value Ideas profile picture
@1207texas Thanks a lot for the positive feedback, glad you found the article worth your time.
Have owned DEO since about 1999 when they still owned Pillsbury and Burger King. Dividends rising all that time I have never had to worry about it at all
Deep Value Ideas profile picture
@cagneyc Thanks for sharing - great to read you are a happy long-term shareholder.
SamsSuperCereal profile picture
Always looking to add to both. I have a heavy personal bias towards BF because they own my favorite bourbon. I've done the Kentucky bourbon tour, Woodford was by far my favorite distillery. That said, I do need to get to Scotland for a scotch whisky tour. The Talisker distillery alone looks like it would be well worth the trip.
Deep Value Ideas profile picture
@SamsSuperCereal I can understand that, and apart from the arguments I outlined in the article, I have a slight bias towards DEO because I like many of its single malt offerings. I can recommend the tour through the Talisker distillery - the isle of Skye is a wonderful, remote location. Be sure to visit Old Man of Storr when you are there, it's an epic natural monument. If you have time, also take the ferry to the Outer Hebrides.
Arctic Investor profile picture
Yep, I don't see myself acquiring BF.A/B without a severe recession as it is always priced too high. Like you, I picked up DEO in 2020.
Deep Value Ideas profile picture
@Arctic Investor Thanks for sharing, I personally hold on to my position in DEO, it's a long-term keeper. It will probably require a situation with momentarily dired-up liquidity to bring the valuation of BF.A and BF.B down to buy territory. Then, it will be interesting watch the A/B spread, A shares are typically not held by ETFs.
cyrano13 profile picture
Re: STZ comparison more of a market cap equal to DEO.
IMO in a recession contrarian view is that sin stocks do better especially at the low end.
Deep Value Ideas profile picture
@cyrano13 I see, thanks for clarifying. Sure, in a recession sin stocks typically perform better than than more cyclical stocks, but with their focus on premium alcoholic beverages, DEO and to a lesser extent BF will most certainly feel the effects of higher unemployment and lower disposable income. I think it will need a serious liquidity event like in March 2020 that brings such stocks down to earth.
captaindividend profile picture
IMO Diageo certainly has the much stronger brand range. Only Jack Daniels has any real profile or significant awareness in Europe. Finlandia appears to be an 'also-ran' in it's category (where Diageo owns Smirnoff). Be interested to see a BF sales breakout by brand/geography. Plus you missed Diageo's Moet share
Deep Value Ideas profile picture
@captaindividend I agree, Diageo has a considerably stronger brand range, as discussed in the article. BF's cash cow sure is its Jack Daniel's franchise. I did touch on BF's geographical sales breakout, apologies I didn't go any deeper, the article was already quite long. The company published a sales breakout by brands in the table on p. 40 of its fiscal 2022 10-K:

cyrano13 profile picture
Wow Maslow? I think unfortunately todays world is more like Skinner.
Maybe a better compare would have been with STZ.
Deep Value Ideas profile picture
@cyrano13 Thanks for the comment, there is indeed a lot that could be expanded on this topic.

I chose BF for its emphasis on whisk(ey) and because I was looking for an investment alongside Diageo with similar portfolio characteristics. As written in the article, I am not really a fan of companies that are predominantly in the beer business (77% of STZ's net sales according to its fiscal 2022 10-K). Why do you think is STZ a better comparison to DEO or BF?
Good writeup. I own both but my DEO position is about 3x the size of my BF.A position.
Deep Value Ideas profile picture
@Signup22 Thanks, glad you liked it!
Excellent article. My pick is BF. It has two things going for it. Less debt than Diageo, and Finlandia vodka.
Deep Value Ideas profile picture
@southbuckeye Thanks, glad you liked it. I also like BF's much more conservative balance sheet. And I admit that I am drawn to Diageo due to some of its brands which I really like a lot. Due to BF's weaker penetration of European markets (except for Jack Daniel's), I sadly don't know Finlandia vodka.
@Deep Value Ideas Finlandia vodka is bottled in Finland from glacier waters and six row barley. It's my favorite vodka.
Deep Value Ideas profile picture
@southbuckeye Thanks for the info, I guess I have to try it at some point - I just never came across it.
hopeful~ profile picture
Thank you for this excellent article.
Deep Value Ideas profile picture
@hopeful~ You are welcome, glad you liked it and thanks for reading.
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