Topic: Cannabis Investing

This premium alcohol maker is looking to partner with a leading cannabis firm

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Cannabis-Connected

Canada’s upcoming legalization of cannabis-infused foods and drinks could offset slowing sales for leading alcoholic beverage producers. One premium producer with worldwide reach continues to weigh the benefits of following those competitors that have already partnered with cannabis producers to create infused beverages.


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DIAGEO PLC ADR $164 (New York symbol DEO; ADRs outstanding: 615.4 million; Market cap: $100.9 billion; www.diageo.com) is a leading maker of premium alcoholic beverages. Its main brands include Guinness beer, Smirnoff vodka, Johnnie Walker scotch, Bailey’s liqueur and Captain Morgan rum.

The U.K.-based company continues to explore a making an investment in a leading Canadian cannabis producer.

Any deal would likely be similar to Constellation Brands’ (New York symbol STD) agreement to acquire a significant equity stake in Canopy Growth Corp. (Toronto symbol WEED). Constellation and Canopy plan to develop cannabis-infused drinks. Those products would help Constellation offset slowing alcohol consumption. Ottawa plans to legalize the sale of foods and drinks containing cannabis in the fall of 2019.

Diageo could also form a joint venture with a cannabis producer. For example, Molson Coors (Toronto symbols TPX.A and TPX.B) recently teamed up with HEXO Corp. (Toronto symbol HEXO). Under the terms of that deal, Molson owns 57.5% of a new joint venture that will develop cannabis-infused non-alcoholic beverages.

Meantime, for the six months ended December 31, 2018, Diageo’s sales rose 5.8%, to 6.91 billion British pounds from 6.53 billion pounds a year earlier (1 pound=$1.75 Canadian). If you exclude the brands that Diageo recently acquired and the negative impact of currency exchange rates, sales gained 7.5%. Earnings per ADR gained 13.6%, to 3.08 pounds from 2.71. (Each American Depositary Receipt represents four common shares.)

Diageo will likely earn $6.77 U.S. per ADR for the fiscal year ending June 30, 2019, and the stock trades at a somewhat high 24.2 times that forecast. The $3.42 U.S. dividend yields 2.1%.

Diageo is a worthwhile hold.

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