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I’ve been thinking a lot about Diageo (LSE: DGE) price recently. That’s what happens when I buy a dormant recovery stock.
I entered the FTSE 100 stalwart last January, hoping to take advantage of a share price plunge after falling sales in its Latin American and Caribbean markets prompted a profit warning.
As a value investor, I like to snap up emerging companies to benefit when their fortunes return. Hard experience has taught me this requires patience though, and that means longer than 12 months. So why am I getting itchy?
Can this ailing FTSE 100 stock get the itch?
In my darkest moments, I think it might end with Diageo shares. Obviously, that’s funny. This is a £52bn company with hallmarks such as these Johnny Walker, The Baileysagain Smirnoff. It also happens to be the proud owner of the world’s trendiest, oldest drink Guinness.
That hasn’t stopped its shares from falling 15% in the past year and 36% over three. Can it get its fizz back?
Latin America’s problems are pressing. The decline was partly due to local drinkers discounting cheaper products than the premium Diageo now specializes in. But there were also problems with creativity. Has management lost its edge since the glory days under inspirational CEO Ivan Menezes?
Drinkers in the US, Europe, and China are feeling the pinch. Normally, I would dismiss that as a cyclical problem, saying that they will soon feel thirsty once they have more money in their pockets.
My concern has is has has has has has been a problem in the past. If this generational change is more than a passing fad, Diageo may suffer.
If young people drink less, even us seniors may start to become self-conscious about our fueling habits. While Diageo has a good advantage in non-alcoholic Guinness 0,0I don’t see this as a transfer to its spiritual catalog.
The drinks sector needs a little pick-me-up
President-elect Donald Trump has raised tariffs by 25% on Mexican goods. That worries Diageo, as its subsidiaries shipped more than 25m liters of tequila to the US last year, including brands. Don Julio again The Casamigos.
Given these concerns, I have even considered selling my shares in Diageo, which are worth 12% less than what I paid for them. So why am I stopped?
Well, people have been drinking alcohol for thousands of years. What are the chances of them stopping on my watch? And, as the tobacco giants have shown, there is a lot of money to be made in a declining sector. Diageo is a global company, and middle classes in emerging markets are moving towards premium spirits.
Although the yield is 3.36% today, Diageo has a strong dividend payout policy for pedestrian shareholders. Let’s see what the chart says.
Chart with TradingView
While I’m gone, Diageo shares continue to stumble. They look to be a shockingly cheap trade at just 16.9 wages. I remember when they were trading at 24 or 25 times.
The 20 analysts providing one-year share price forecasts have produced an average target of just over 2,705p. If so, that’s up about 15% from today. That doesn’t make me happy either. Obviously I feel empty looking at the stock. I’ll hold on, but I won’t buy more.
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