Buy This, Not That: A Tale of Two Spirit Giants
Shah Gilani|January 1, 2025
In the spirit of New Year’s Day… we’re mixing up a potent analysis of the spirits industry’s top two heavyweights.
One is nursing a financial hangover… it’s spending more on dividends than it makes in profit.
While its brands might be party favorites, its financials are giving investors a hangover.
Across the pond, its U.K. competitor is toasting its success…
It has twice the revenue and triple the profit margins.
Get the straight pour on which spirits stock to store and which to ignore.
It’s all in this week’s “Buy This, Not That” video.
Click on the thumbnail to dive in.
TRANSCRIPT
Hey, everybody. Shah Gilani here with your weekly BTNT.
If you’re getting this Wednesday morning, you may be a little hungover.
Happy New Year to you all. Hope you celebrated well.
I’m going to cover two of the world’s largest liquor companies today because you may be feeling it. I’ll start with Constellation Brands (STZ). Let me pull up a chart for you.
STZ – I think you probably know most of their brands. If you like beer, they have Corona, Modelo, and Pacifico. They also have liquor offerings and champagnes. Their wines include Kim Crawford, Naomi, Robert Mondavi Winery, and Prisoner. For whiskeys, they have High West. Their tequila brand is Casa Noble, and for vodka, they have Svedka. They have a solid array of offerings in the liquor universe.
Everyone knows Constellation because of its brands and because it’s one of the most talked-about liquor companies. Looking at this chart, though, it’s NOT a buy for me.
It has gone downhill this year. We had a high of $275 in April, and now we’re at $220. The chart looks ugly.
Another concern: It’s a $40 billion market cap company with trailing 12-month revenues of about $10 billion. They extract a profit margin of 5.69% – unimpressive for a liquor company where you expect higher markups.
They pay a dividend with a 1.84% forward yield. What’s noteworthy is the dividend cost: $733,421,000 annually. The net income available to common shareholders is only $579 million, creating a significant shortfall. They’ll need to borrow to pay the dividend, with a payout ratio over 120%.
The balance sheet shows over $12 billion in debt and about $65 million in current cash. The STZ chart may be approaching oversold territory, but this is a NOT for me.
Now for a BUY: Diageo PLC (DEO). This UK-based company has a $70 billion market cap with $20 billion-plus in trailing 12-month revenue – twice Constellation’s – and a 19% profit margin. That’s what you expect from a liquor company.
Their forward dividend yield is 3.27%, and they can afford it. The payout ratio is 58%, leaving plenty to reinvest. Their brands include Guinness, Seagram’s, Johnnie Walker, Crown Royal, Tanqueray, Baileys, Captain Morgan, Don Julio, and vodkas from Smirnoff to Ciroc to Ketel One.
The chart shows it’s down but starting to bounce, possibly finding a bottom.
Unlike Constellation, we’re trading above the 50-day moving average. Between Diageo and Constellation, it’s clear: avoid Constellation, BUY Diageo.
That’s it. Hope you had a marvelous New Year’s Eve celebration. Happy new year, and I’ll catch you next week. Cheers.
Shah Gilani
Shah Gilani is the Chief Investment Strategist of Manward Press. Shah is a sought-after market commentator… a former hedge fund manager… and a veteran of the Chicago Board of Options Exchange. He ran the futures and options division at the largest retail bank in Britain… and called the implosion of U.S. financial markets (AND the mega bull run that followed). Now at the helm of Manward, Shah is focused tightly on one goal: To do his part to make subscribers wealthier, happier and more free.
