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The share price chart for FTSE 100 drinks giant Diageo (LSE: DGE) makes for interesting viewing. Does it offer a potentially brilliant opportunity – or an alarming signal?
Since the start of 2022, the Diageo share price has tumbled 48%. Ouch.
Some potential opportunities
That has, however, thrown up a couple of possible opportunities.
One is a higher yield. Diageo has raised its dividend each year for decades, but until recently its yield was nothing to write home about.
A falling share price, however, has pushed the Diageo dividend yield up to a level of 3.7% today. That is above the FTSE 100 average.
Investors who like the business but not the share price also have the opportunity to buy at a much lower valuation. That is exactly what I have done, buying Diageo shares on several occasions this year.
Here’s the worry
What, though, if the Diageo share price just keeps on falling? What if it never again hits its former peak, let alone surpasses it?
Businesses can lose value permanently for various reasons. Some do so because of poor management, whereas others are simply trapped in a worsening commercial environment.
Diageo’s management over the past several years has been underwhelming, leading to a change in chief executive this year. But, as an investor, that does not worry me too much. I think the business’s unique production facilities, iconic brands, and large customer base should be able to withstand periods of weak management.
The far bigger concern I could see pushing the Diageo share price down further is changes in consumer demand. Younger generations are drinking less than previous ones. Meanwhile, health concerns are weighing on drinkers of all ages.
According to a Gallup poll released this month, the number of Americans who say they consume alcohol has fallen to the lowest-ever number in 90 years of polling. Similar trends are visible in many other markets.
Wait and see
Diageo has been expanding its non-alcoholic drinks portfolio, but there are swathes of soft drinks already available and Diageo’s heartland is in booze.
Whether drinking levels pick up in future remains to be seen. There is a real possibility that they may not.
However, cigarette use has been in decline in key markets for decades already and tobacco companies continue to generate cash on a vast scale. Diageo’s range of premium brands will likely continue to appeal to a huge market even if it is in long-term decline. Tobacco shows that a declining market can still offer manufacturers significant pricing power, helping mitigate falling sales volumes with price rises.
I am prepared for the possibility that the Diageo share price could potentially never get back to where it once was. Its current price-to-earnings ratio of 26 is far from a screaming bargain.
But I reckon long-term demand for alcoholic drinks, whether lower or higher, will still be substantial – and Diageo is well-placed to keep benefitting from it. I have no plans to sell my shares, though, for now at least, I will not be buying any more.
