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Diageo‘s (LSE:DGE) share price has fallen a whopping 30% over the last 12 months. It’s also more than halved in value since reaching all-time peaks above £41 a share four years ago. Will the FTSE 100 company ever reclaim its previous status as a blue-chip star?
For investors seeking attractive recovery plays on the cheap, I think the drinks maker’s worth serious consideration. At £16.70 a share, Guinness trades on a forward price-to-earnings (P/E) ratio of 13.3. That’s significantly below the 10-year average of 20.8 times.
Its dividend yield, meanwhile, has charged to 4.8%. That’s above the long-term average of 2.8%, and above the FTSE 100 average too.
On balance, I think this could be a once-in-a-decade opportunity to consider this quality share on the cheap. Want to know why?
What could go wrong?
Catching a falling knife in investing is notoriously difficult. Even the most experienced traders and market commentators find it challenging to accurately predict near-term share price movements, and get burnt trying to buy ‘on the dip.’
Investors in Diageo today could experience some pain before things get better. Given the number of challenges the company faces, that wouldn’t surprise me (speaking as a beleagued long-term shareholder).
Its decision to cut sales guidance in November wasn’t an encouraging sign. The company’s now expecting “flat to slightly down” organic net sales for this financial year as it struggles to counter weak consumer spending in key markets like the US and China.
After years of heavy investment, Diageo’s focus on the premium end of the market is right now working against it.
But can it rebound once conditions for consumers improve? There are no guarantees, with younger people not drinking alcoholic beverages as previous generations did. The weight loss jab explosion, which suppresses users’ food and drink intake, is another hurdle it’ll have to overcome.
Betting on Diageo shares
Diageo is no lightweight, though. Its brands — some of which date back to the 17th century — have weathered many crises down the years. And I’m optimistic they will drive a profits recovery over time that will lift the share price.
The company’s long demonstrated an ability to adjust to changing consumer tastes. And while many of us are living healthier lifestyles, this is another challenge I’m confident Diageo will rise to. Indeed, its Guinness 0.0 stout is selling at double-digit growth rates. I’m excited to see what other non-alcoholic variants of popular brands will be coming down the line.
With a brand new chief executive, the FTSE firm should (in my view) be better placed to seize this opportunity too. The business has more than a dozen billion-dollar brands in its stable, but many more underperforming labels. I’m expecting ‘Drastic’ Dave Lewis to do what he did at Tesco by cutting out the duds to reduce costs and create a more focused, profits-generating machine.
Finally, the long-term market outlook in Diageo’s critical emerging markets also remains strong. The company has significant exposure to Asia, Latin America and Africa, meaning it’s well placed to capitalise on booming personal income levels in these regions.
While it’s not without risk, I think Diageo’s worth serious consideration following its share price slump.
