2021 was a ‘vintage year’ for drinks investors

Despite the countless hurdles presented by the pandemic, 2021 proved to be an exceptional year for global wine and spirits investors with eight major drinks companies seeing their share prices soar.

For shareholders invested in global wines and spirits, 2021 was a vintage year, with eight major companies seeing their share prices soar.

The eight are Diageo, Pernod Ricard, LVMH (because of its Moët Hennessy arm), Rémy Cointreau, Davide Campari Milano, Treasury Wine Estates, Constellation Brands and Brown Forman.

Together they gained 28% to show a profit of £2,225 in the past 12 months on a stake of £8,000 invested evenly across them. And that return does not include the surging dividends that most paid during the year to underline both the fact that they had come through the crisis and to restate their confidence in the year ahead.

Contextually, there has been a rise of 14.3% in London’s FTSE 100 index, its best performance for five years, and the 17.5% gain on Wall Street.

The outcome cannot be dismissed as simply recovery from the coronavirus-engendered  ravages to world trade because the eight global giants together generated a combined 12% profit in 2020 as the sector bounced back from the early-year  lockdowns around the globe combined with the disappearance of international travel.

What has been demonstrated is the agile management and swift-footed response of the whole sector to meet potentially devastating change head on, as well as an ability to adapt to traditional patterns of demand being upturned virtually overnight and to convince investors that the wine and spirits groups have a healthy future.

If you compare these with where they stood in the early autumn of 2019 – before the first rumours of a virus had spread – the shares had gained almost 30% by the end of 2021. In ‘normal’ times that would be considered excellent.

Diageo’s shares rose by 36% in 2021, Pernod Ricard’s and Remy Cointreau’s by 35%, LVMH by 42% and  Davide Campari Milano by 39.5%.

Diageo, as the biggest group in the sector with the most powerful portfolio, had lost 6% of its value in 2020 but since then has powered back as consumers looked for the reassurance of big, quality brands and continued the shift from beer and wine to spirits for home consumption.

The shares are also popular because Diageo has continued to increase its cash payouts through its solid dividends policy, which has also been boosted by share buybacks.

Investors have furthermore lapped up Diageo’s bullishness. Chief executive Ivan Menezes expects organic sales growth of between 5% and 7% from 2023 to 2025 compared with a growth rate between 2017 and 2019 of 4% to 6%.

Not only that, he has targeted increasing Diageo’s share of the total beverage alcohol market from 4% in 2020 to 6% in 2030, a decade in which Menezes believes a further 700 million potential consumers will have access to his brands, 100m of them alone in China.

If he were to achieved this, Diageo’s market value could double to more than £200 billion, suggesting that the shares are undervalued even at £40+ today.  So it is hardly surprising that chairman Javier Ferrán spent more than £800,000 buying Diageo shares last year.

Much the same pattern is true of Pernod Ricard. Chairman and chief executive Alexandre Ricard has upped his targets for the group and has also resumed its share buyback programme.  Investors will be eager to compare half-year trading figures to the end of December with Diageo’s when they are published in mid February. Diageo’s come out at the end of this month.

Key for Pernod Ricard will be its performance against Diageo in the vital North American market and in China, which is now the French group’s second largest.

The startling fact about Rémy Contreau’s shares in 2021 is to look at how strongly they have performed since mid 2019 before China imposed its first lockdown.

Rémy Martin is by far the market leader in China’s vital Cognac market and the owner was pummelled by investors in the early days of the pandemic as a result, but since then its shares have put on 70%, reflecting its unrelenting drive to premiumisation and increased margins.

LVMH, Europe’s biggest company by market value, also saw its shares jump sharply last year. Part of that was due to recovery from 2020 when they fell by about 25% but in large part that was due to its expanding portfolio of fashion, luggage and jewellery houses rather than its wine and spirits arm, which nevertheless turned in solid results.

What LVMH’s performance underlined is that demand for luxury items continues unabated  and will continue to climb as global wealth and the exploding middle classes swell, especially in China which now accounts for 40% of global luxury spending.

That demand switched partially from travel destinations to ecommerce and local outlets -the same was evident in the US, Europe and the Middle East – and investors have not been slow to spot that it will continue to soar, partly due to the gradual return of international travel and also thanks to the development of huge duty free facilities such as Hainan, where an enormous free port and tourist complex is being developed to attract the wealthy of not just China but the whole of Asia.

Campari is making its first major forays into the Far East and did well from the drink-at-home cocktail boom in North America. Unlike many of its competitors, the group has acknowledged that it will need to increase its prices in 2022 to continue its up-market drive and to at least maintain margins.

Across the Atlantic, Constellation Brands and Brown-Forman did less well than their European competitors.  First and foremost it is important to note that they both performed well in 2020, their shares rising by 15% and 16.5% respectively as volumes in their home market were only marginally affected as Americans swung from on-trade to home consumption.

Constellation’s shares yo-yoed throughout last year, affected by the sudden downgrading of forecasts for the hard seltzer sector in which it holds about 8% of the market, and the continuing poor outcome from its US$4 billion stake in cannabis group Canopy Growth.

Even so, news that Constellation has agreed its future beer production facilities in Mexico spurred the shares as did the completion of the deal to sell commodity wine brands to Gallo.

Brown-Forman had a difficult year, its shares falling by 8%.  With its portfolio, especially Jack Daniels, skewed towards the on-trade, the group suffered from off-trade distribution difficulties, and the rapid growth of RTDs, for which it was under-prepared. The recent pact with brewer Pabst is designed to resolve that problem in the longer term

Brown-Forman also reckoned that being an innocent victim of the tariff war with the EU had cost it around US$70m in annual sales but this restraint has now been removed.

Treasury Wine Estate’s China tariff nightmare slashed the Australian group’s value by about 40% in 2020 as more than a third of its export market disappeared overnight. But chief executive Tim Ford has been sure-footed in plotting a recovery.

He has restructured the group internally, unloaded underperforming brands in the US, targeted other Asian markets and is continuing to find ways of circumventing the effective China embargo on Australian wines by sourcing from the US and Europe.

This has convinced brokers that although Treasury’s shares remain well below their late 2019 level, the group looks set to prosper, especially as the opportunistic rumoured private equity bid has failed to appear.

Treasury’s shares gained 23% in 2021 and brokers are bullish about continued progress in 2022, as they are about all eight groups.