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Sir Dave Lewis has a plan to revive a Diageo (LSE:DGE) share price that has been one of the FTSE 100‘s worst performers in recent years. And I think it’s going to work.
Until recently, I’ve been sceptical. But a closer look at the firm’s assets and its latest plans have left me feeling much more bullish about the stock.
So what’s the plan?
Diageo’s best-known for its category-leading brands such as Johnnie Walker, Smirnoff, and Guinness. But these only account for around half of the firm’s total assets.
The rest include things like manufacturing operations in Africa, a stake in a Chinese spirits company and, indirectly, a stake in an Indian cricket franchise.
The current plan is simple enough. It involves getting rid of these latter assets to focus on its core strengths and the brands that are the most powerful. Doing so could raise significant cash, boost margins and reduce the firm’s capital intensity.
And it’s a strategy that UK investors should be familiar with.
Exhibit A: Tesco
Diageo’s new CEO is known for a successful turnaround at FTSE 100 retailer Tesco. And the plan there involved divesting non-core businesses to focus on more promising ones.
When Lewis took over, the supermarket chain had assets in Turkey and South Korea as well as restaurants and as a broadband provider. These were sold off as part of the restructuring.
After this, the company was able to invest in its core UK operations. And doing this has put it in a much stronger position to compete on price with the likes of Aldi and Lidl.
On the face of it, there’s a similar opportunity with Diageo. The firm has a disparate set of assets and the new CEO has a good record in improving businesses in this position.
Exhibit B: Unilever
Another FTSE 100 company that has had success with this strategy recently is Unilever. A couple of years ago, the firm decided to sell off its weaker brands to focus on its stronger ones.
As a result, the likes of Brylcreem, Timotei, and VO5 were sold, along with the entire ice cream division. And there are reports that some of its steadier food brands might also be up for sale.
The results for Unilever shareholders have been impressive. Overall sales growth has picked up and the stock has more than 10% a year since the start of 2024.
Whether the company can maintain this momentum with future divestitures remains to be seen. But Diageo has a lot more in the way of obvious businesses to sell off.
A change of sentiment?
I’ve been wary of the idea that a recovery for Diageo was imminent. US wholesaler inventories are at unusually high levels – and this looks set to weigh on sales.
I still view this as a short-term challenge. But I’m starting to become more optimistic about the company’s turnaround potential. The main reason for this is that the firm has more non-core assets than I realised. And selling these to focus on its strongest brands is a strategy that’s worked well elsewhere.
That doesn’t guarantee success for Diageo. But with the stock still close to a five-year low, I’m willing to go on buying it on the grounds that the potential rewards might be worth the risks.
