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Berko: Keep those shares of Diageo, Dollar Tree

By Malcolm Berko

Published: December 24, 2016, 6:00am

Dear Mr. Berko: I am 67, am divorced and inherited 172 shares of Diageo, 287 shares of Dollar Tree, 84 shares of Ruby Tuesday and 1,783 shares of AT&T. I know your opinion on AT&T. I’ll keep it for the rest of my life. But I need your opinion on the other three. The certified public accountant who did my father’s taxes introduced me to a stockbroker who recommended I sell all of the stocks, including AT&T, and buy a $100,000 annuity guaranteeing 9 percent. They spent three hours with me and my daughter, telling us that this annuity is the “best investment next to sunshine.” When we discovered that the commission would have been 10 percent and the management fee would have been 5.5 percent annually, we declined. What do you think about the three stocks?

— RN, Oklahoma City

Dear RN: Sounds as if those two cretins can catch flies with their tongues. Be glad you didn’t get caught in their trap. That annuity is foul vomitus and a terrible recommendation from two deplorables. Fire that CPA and his rogue.

Diageo PLC (DEO-$104) has many ancestor companies, the earliest of which, Justerini & Brooks, formed in 1749. After a panoply of mergers, Diageo was formed 248 years later. Diageo is a nonsense name like Exxon. “Dia” is a Latin word meaning “day,” and “geo” is a Greek root word meaning “world.” According to DEO’s branding consultant, Diageo refers to a company that “gives pleasure every day, everywhere.” That’s a stretch!

In 2016, DEO produced, marketed and distributed $14 billion worth of alcoholic beverages — including the world’s top two brands, Johnnie Walker and Smirnoff. DEO lights up my radar because brands such as Crown Royal, J&B, Baileys, Ketel One, Tanqueray, Don Julio, Captain Morgan, Ciroc and Guinness are probably on a shelf of every household in the industrialized world. By 2021, analysts expect revenues to grow by 30 percent, to $18.5 billion, with earnings improving by 50 percent, to $7.35 a share, and an increase in the $3.50 dividend to $4.45. DEO’s financial position is A-plus, and Wall Street believes that DEO could trade at $145 by 2021. Keep this stock.

Dollar Tree (DLTR-$85) is a discount variety store selling thousands of items at a buck apiece. The success of the dollar store concept is a threat to big grocers and convenience stores. In the past five years, the compound annual growth rate of the dollar store industry’s revenues has increased by 8.5 percent, with consumables accounting for 67.4 percent of aggregate sales. DLTR has done even better than that, with revenues in the past 10 years growing fivefold. Combined profits from DLTR’s 14,400 locations have also grown fivefold, thanks to net profit margins of 5.1 percent — the highest in the industry. And unlike those of other stores in the retail industry, DLTR’s revenues and earnings are nearly impervious to recession, inflation and the economic cycle. Most DLTR customers are lower- or middle-class consumers who shop at discount stores to save money, especially on personal care items and food products.

DLTR stores have frozen food sections (with hamburgers, fish tacos, etc., also at a buck each) and sell condiments, varieties of canned fruits and vegetables, cereals, tuna, bread and similar consumables. DLTR also sells toothpaste, hair spray, soap, deodorant and the like. The U.S. food stamp program, serving more than 40 million people, costs taxpayers about $75 billion a year. It’s estimated that the program could save $30 billion a year if Congress required food stamp users to shop at DLTR, where a family of four can be well-fed for less than $38 a week.

This is a jim-dandy stock for conservative long-term investors. The Street believes that DLTR could see revenues reach $30 billion by 2021 and post earnings of $7.40 a share, nearly double this year’s earnings. Some analysts think DLTR could trade above the $165 mark, and it probably will split after the price exceeds $100. Keep this stock.

I’d rather gargle with liquid nitrogen than own Ruby Tuesday (RT-$3.50). Enough said!

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.

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