Warren Buffett owns this FTSE 100 stock. But should he?

Legendary investor Warren Buffett is interested in her Diageo (LSE:DGE) shares in a subsidiary of Berkshire Hathawayan investment vehicle of which he is the chairman, chief executive and largest shareholder.

But I think it’s fair to say that the decision to buy stock in the beverage maker wasn’t one of his best moves. After buying the company in the first quarter of 2023, the share price has been falling steadily.

From the beginning of 2023, it decreased by three. In November 2023, investors reacted negatively to a profit warning following a decline in sales in Latin America and the Caribbean.

Compared to the year ended 30 June 2023 (FY23), revenue in FY24 decreased by 1.4%. However, earnings per share were down 11.8%. Unsurprisingly, this seems to have led to a loss of confidence in the company’s prospects.

Don’t be afraid!

But I suspect that Buffett will not be too concerned about these developments. The American billionaire philosophy is about investing for the long term. He once described his favorite pastime as “forever“. And he advises that “only buy something you would be more than happy to hold if the market closes in 10 years“.

Buffett’s method is to identify well-managed companies that are undervalued. This makes perfect sense to me. So should I buy Diageo shares?

Reasons for me to buy

The first thing to notice is the sale of its most popular product, Guinnesstook a trip in the last few weeks. Promoters Lewis Capaldi and Jason Momoa, as well as a series of high-profile international rugby matches sponsored by the stout, helped boost demand. Unfortunately, it means that publishing offers in Great Britain are limited.

But the company has many other popular products in its portfolio. In fact, it prides itself on offering something for everyone. For example, six whiskeys priced from $15 a bottle (black and white) to $250+ (Johnnie Walker Blue Label).

The company has identified a trend where consumers are “drinking better, not more“. And with 62% of its FY24 sales coming from so-called premium brands, it should be well placed to capitalize.

And the drop in its share price helped lower the stock’s historical price-to-earnings (P/E) ratio to 17.9. It was more than 20 years ago when Berkshire Hathaway took its stake.

Accidents

But the company is carrying a lot of debt. On 30 June, its balance sheet revealed borrowings of $21.5bn. This is more than five times its FY24 revenue from its operating activities.

And its dividends aren’t high enough to compensate me for the extra risk that comes with owning shares in a highly leveraged company. Based on its FY24 payout, the stock currently yields 3.3%. This is below the FTSE 100 an average of 3.8%.

I am also concerned that 43 days before the November 2023 profit warning, company directors say the group is on track to meet its current forecasts. This highlights the potential volatility of the drinks market. Less generous, it may also suggest that Diageo’s management team has limited forward visibility into business performance.

At the moment, I can’t find enough reasons to make me want to buy the stock. Personally, I think there are better opportunities elsewhere.