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Diageo‘s (LSE: DGE) been one of the worst-performing shares in my ISA this year. Year to date, the share price is down about 35%. Would I be mad to buy more while they’re near £16? Let’s discuss.
Five reasons I might buy
I’ve been closely monitoring Diageo shares while they’ve been falling and getting increasingly tempted to buy more for my portfolio. But the way I see it, there are both pros and cons of buying more.
Starting with the positives, they’ve fallen a really long way (around 60% from their highs, which is quite astonishing) and they now look to offer a fair bit of value. At present, the forward-looking price-to-earnings (P/E) ratio is about 13.6 – low for a company of Diageo’s quality.
Next, the dividend yield appears to be attractive at around 4.6%. So investors could receive some decent income from the stock from here. Additionally, there’s a new CEO on the scene – Dave Lewis. I expect him to aggressively try to improve performance in the months and years ahead.
Next year could also be better for ‘quality’ stocks (consistent performers). This year hasn’t been good for this area of the market – instead the focus has been on cyclicals.
One other thing that’s worth mentioning (it’s a little random) – analysts at Barclays say the arrival of self-driving robotaxis could lead to more alcohol consumption in the years ahead. They see this technology adding $42bn to the market over the next decade.
Three things that concern me
Turning to the cons, let’s start with the fact that the share price is in a really ugly downtrend right now. It really is brutal and it could keep going. If the stock was to keep falling, buying now would just increase my losses. And I don’t want that.
I’ll point out here that I prefer to buy stocks that are trending up (ideally on a small pullback). Because trends can stay in place for a while.
As for the dividend, I think there’s a good chance that the new CEO will reduce it (to reduce debt and bolster the balance sheet). So the yield I quoted above is probably unreliable.
Note that last financial year, the company didn’t raise its payout. So the multi-decade dividend growth streak (which a new CEO may have wanted to preserve) has gone.
Of course, the other big issue is that attitudes towards alcohol are going through a weird shift. Not only are younger people moving away from it but GLP-1 weight-loss drugs (eg Wegovy and Mounjaro) are leading to less consumption.
So the question is – can this company generate growth in a world in which demand is potentially declining? Because if it can’t, the stock may end up being a dud in the long run.
My move now
Putting this all together, I’m still really tempted to buy, despite the risks. I haven’t made a final decision yet but I reckon if the stock falls back to around £16 I’ll pull the trigger and top up my position.
