This beverage giant could further boost cannabis stocks

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Cannabis-Connected

This alcohol beverage giant wants to sell some of its smaller brands, but it may also be interested in partnering with a marijuana producer to develop a cannabis-infused drink. Recent speculation about who that partner will be has fuelled gains for several pot stocks. Regardless of which grower it chooses, that kind of product could help the company offset stagnant alcohol sales.


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DIAGEO PLC ADR $142 (New York symbol DEO; ADRs outstanding: 615.4 million; Market cap: $87.4 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.

According to recent media reports, the U.K.-based company may be close to 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 sometime in 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 will own 57.5% of a new joint venture that will develop cannabis-infused non-alcoholic beverages.

Meantime, Diageo is entertaining offers for what it sees as its non-core U.S. brands such as Myer’s rum, Popov vodka, Romana Sambuca and Goldschlager. The company hopes to sell all the brands in one transaction for as much as $1 billion. It would then be free to focus on Johnnie Walker and its other major brands.

For the fiscal year ended June 30, 2018, Diageo’s sales rose 0.9%, to 12.16 billion British pounds ($16.4 billion U.S.) from 12.05 billion pounds a year earlier. Unfavourable exchange rates offset higher volumes and selling prices.

Earnings rose 8.1% to 2.95 billion pounds ($4.0 billion U.S.), or $6.40 per ADR, from 2.73 billion pounds ($3.5 billion U.S.), or $5.51 per ADR.

Diageo expects negative currency exchange rates to cut its fiscal 2019 revenue by 175 million pounds. It should earn $6.58 per ADR for the year, and the stock trades at a somewhat high 21.6 times that forecast. The $3.37 dividend yields 2.4%.

Diageo is a worthwhile hold.

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