5 reasons I’d consider buying Diageo shares

January can be a quiet month for the alcohol trade, as some consumers start the year with plans to cut back on boozing after the festive season. However, as a long-term investor, I look beyond the immediate selling trend when considering whether to add stocks to my portfolio.

Take a drink maker Diageo (LSE: DGE) is an example. I can see several reasons to consider adding the stock to your portfolio. Here are five of them – along with the rationale for not buying just yet.

1. strong customer demand

Humans have been drinking alcoholic beverages for thousands of years and I don’t see the trend stopping. The market for the range of spirits and beers produced by Diageo is vast. It is likely to remain the way for the foreseeable future.

One risk to sales is that younger people are drinking more than in previous generations. But Diageo has invested in non-alcoholic drinks as well Seedling seedsa move that can help you benefit from the trend instead of just hurting it.

2. good brand

The company has a selection of well-known brands, from the famous stout Guinness for Johnny Walker whisky.

That helps give the price power. The brand builds customer loyalty which means the company can charge premium prices for its products.

3. Global reach

Although Diageo is based in the UK, its reach is truly global. The business sells its products in more than 180 countries.

It has a strong position in key US markets and has built scale in emerging markets including India and China.

However, such complex distribution networks can increase costs for businesses, affecting profits. But I see that as an overall strength. Diversification means that even if a downturn in one of its key markets like the US can hurt Diageo’s sales, its broad reach can limit the impact of the problem on overall profits.

4. Attractive dividend

Diageo is a dividend aristocrat, having raised its shareholder payout every year for more than three decades.

This does not mean that it will continue to do so in the future. But I’m optimistic, because the company generates a lot of cash flow and the dividend is covered twice by last year’s earnings.

5. Simple business model

When the firm has built a successful business, the simplicity of the commercial model appeals to me. This reduces the financial risk of poor execution.

Diageo manufactures, markets and sells alcoholic beverages. There is a huge market demand and the company’s brand is popular. This was no accident, but reflected decades of hard work.

However, the result is that Diageo has a simple business model. That makes the company easy to execute – and easy for investors to understand.

Should I buy shares?

Overall, I see Diageo as a great company with attractive long-term prospects.

As an investor though, I follow the approach of billionaire investor Warren Buffett in trying to buy into large companies that trade at an attractive price. Today, Diageo is trading at a price-to-earnings ratio of 24.

I do not see that as a very attractive price despite the strength of the company. Therefore, I have no plans to add Diageo to my current portfolio.