I already own Diageo shares and with the share price falling recently I’ll likely add more to my portfolio in the coming weeks and months. These are the reasons why.
The shares are cheaper
Having fallen 22% so far this year, shares in this quality company are much cheaper. I think the company is fundamentally still very good. It is experiencing a short-term knock as a result of Covid-19 and customers like bars and restaurants having less need for alcoholic drinks.
This demand is likely to already be coming back. The trend of the economy reopening and people going out is likely to keep accelerating. Even so the shares have fallen 5% in just the last month – but then the FTSE 100 has also reversed.
Overall, I’d say the shares have got much cheaper, even at a time when the worst effects of the pandemic are likely behind us. Looking forward I expect Diageo to return to its pre-pandemic momentum over the coming years.
Strong brands and international presence
Diageo has over 200 brands selling in over 180 countries. It is a serious player in the global drinks industry with diversified earnings and the firepower to snap up fast-growing rivals. For example, it has just agreed a deal to buy the Ryan Reynolds-owned Aviation American Gin along with its parent company Davos Brands.
The deal – worth up to £466m – gives Diageo further footprint in the growing North American gin market. Aviation’s sales increased by more than 100% in 2019 as a result of this trend.
This acquisition is just the latest type that sees Diageo buy fast-growing challenger brands that can enhance its portfolio and power future growth. This helps it stay at the front of the pack.
Adding Diageo shares to my portfolio
As a leader in its industry, Diageo is the kind of company I like to invest in. It has scale, pricing power, the ability to buy faster-growing brands, and to sell internationally.
Now with the shares down over 20% so far this year, I think Diageo shares are looking too cheap to ignore. It has long-term potential to compound and provide reliable, steady growth. In more normal times this is usually something investors are willing to pay a premium for. A bit like those fancy gins.
The share price fall has been a direct result of the pandemic. Now with pubs and restaurants reopening and households able to get together – in most places – the potential for a bounce back is in place. I fully expect the shares should make back the 20% or so they’ve lost over the next 12 months. Over a longer time frame I expect they can make steady gains most years. I believe this consistent growth can boost the returns of my shares portfolio. That’s why I’ll keep adding Diageo to my ISA and SIPP, on top of the holding I already have.
