Companies in the Beverage Industry display the ability to generate strong cash flow and consistent earnings growth, even in times of economic softness. They sell products that are somewhat discretionary, but are consumed quite regularly and appeal to a wide range of customers. They maintain steady profit margins, and revenue growth is derived from numerous channels such as new products, price increases, mergers & acquisitions, and international expansion, especially in emerging markets.

Effective advertising is important for attracting new customers and keeping existing ones. Global beverage suppliers are required to focus on catering their marketing strategy to each individual country they operate in. It is important to consider the number of countries a beverage company currently operates in, as well as the likelihood of acceptance in new markets.

The stocks featured in this screen display low risk attributes. We chose to include only those with Price stability scores in the 90th percentile and above. Further, the stocks that were chosen received above average marks for Safety. Finally, only companies with projected average annual free cash flow growth above 10% were considered. The two stocks that met these criteria were Anheuser-Busch InBev (BUD) and Diageo PLC (DEO)

Anheuser-Busch InBev

Anheuser-Busch is the world’s largest brewing company. The business was created in 2008 after InBev and Anheuser-Busch merged and became the most formidable beer brewer in the world. Headquartered in Belgium, the company produces, markets, and distributes over 200 beers to countries all over the globe, with major markets including North America and Latin America, which contribute the lion’s share of the company’s sales. Major brands are Stella Artois, Budweiser, Bud Light, and Hoegaarden.

This brewer is well situated for strong earnings expansion over the next two years. The company has recorded solid sales and share-net growth thus far in 2012, aided by strength from the Bud Light family. Given the stronger domestic consumer backdrop, the company has been able to implement a more rational pricing structure to negate inflation of raw ingredients such as wheat and barley. Further, top- and bottom-line growth will likely be attained from the pending acquisition of Grupo Modelo, makers of the popular Corona line of beers.

Anheuser has agreed to sell its stake in Crown Imports (a joint venture between ABinBev and Constellation Brands) to Constellation Brands for $1.8 billion. The deal should further solidify Anheuser’s place in the brewery realm and will give the company a stronger foothold in the substantial Mexican beer market.

All told, Anheuser has been able to generate healthy cash flow and has managed to keep its debt at a manageable level. This positions the company to continue expanding through merger activities, new products, and brand building on its existing core product portfolio. This equity should appeal to conservative investors, given its strong Safety rank.

Diageo PLC

Headquartered in London England, Diageo was established in 1886, and is one of the world’s largest alcoholic beverage producers and distributors. The company’s operations include distilling, brewing, packaging, and marketing its extensive portfolio. The following 14 brands comprised 66% of fiscal 2011 sales and was allotted 78% of Diageo’s marketing budget; Whiskey: Johnnie Walker, Crown Royal, J&B, Buchanan’s, Windsor, Bushmills; Vodka: Smirnoff, Kettle One, Ciroc; Rum: Captain Morgan; Liqueur: Bailey’s; Tequila: Jose Cuervo; Gin: Tanqueray; Beer: Guinness.

The beverage titan is focused on augmenting its size through acquisition activities. At present, it seems to have its eye on acquiring Indian billionaire Vijay Mallya’s stake in United Spirits, one of the largest beverage companies in India. The move would be a positive one, in our view, because it would strengthen Diageo’s presence in this emerging economy. Furthermore, the deal would allow Diageo to peddle its own brands in this developing region. The rumor mills are also churning with talks that the company is seeking to purchase the Jose Cuervo brand. Bottom-line growth should also be attainable through the sheer strength and volume of Diageo’s massive portfolio of well-known brands.

Expansion avenues will likely continue to be explored since the company has a solid balance sheet. With ample cash and a low debt level on the liabilities column, this should provide ample room for growth platforms to be pursued. We anticipate that the company will continue to sustain a healthy cash position given its solid growth agenda and numerous expansion opportunities. All told, these high-quality shares should suit multiple investors.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.