After the performance of Diageo (LSE:DGE) shares this year, I decided to take a closer look at the company. Most importantly, to ask whether there’s room for Diageo shares to continue their rise.
With Diageo shares up by 17.8% year-to-date, investor confidence in the company has quickly recovered from the initial stages of the pandemic. In fact, at approximately 3,300p per share, the company is trading above where it was prior to the pandemic, at around 3,200p.
Resilience during pandemic
In its first half of 2021 results, Diageo managed to increase net sales of its alcohol beverage products by 0.9%. The company noted that the increase in sales was a result of people buying the products for consumption at home. The company’s sales grew by 12% in North America and by 10% in the UK.
This meant that net profit was only down by 15.3% year-on-year, and was still healthy at £1.58bn.
Shortly after the first half of 2021 results, Diageo announced it would return capital to shareholders. The company announced that it had decided to increase its dividend by 2%. All of this resulted in Diageo shares rising by 9.95% in the last three months.
Looking to the future
As bars and restaurants open up across Europe, could demand for the company’s products positively impact share price further? Looking ahead to full-year 2021 results, Diageo announced that it expects organic operating profit growth to increase by at least 14%. The company stated the increase in profit will arrive from the economic re-opening in Europe and a recovery in its Africa, Asia Pacific, and Latin American markets.
This outlook was a driver behind the decision to repurchase shares. By the end of the fiscal year 2022, the company plans to repurchase £1bn shares and immediately cancel them. Another promising sign for investors was Diageo stating that e-commerce rose to 5% of group sales, up from 2% prior to the pandemic.
The risks
The principal risk to shareholders of Diageo is similar to that most businesses currently face – the course the pandemic will take. Further widespread lockdowns would again reduce profit, which could weigh on the share price.
Broader than this is the question of how much further growth can Diageo squeeze from its market. The overall beverage industry has experienced consolidation through acquisitions. At present, half of the world’s top-selling spirit brands are owned by Pernod Ricard, Baijiu, and Diageo itself. This makes further growth through acquisition tricky.
To answer my original question, I can’t see Diageo shares rising significantly as pandemic restrictions ease further. The company’s share price recovered from the pandemic hit quickly. This was followed by Diageo broadcasting its positive outlook through the share buyback. I believe this has already been accounted for in its current share price, which is fairly valued, in my opinion.
The fact that Diageo shares did so well during the pandemic is a sign of an overall strong business. Rather than a reopening play, I would look to Diageo when adding a steady, low-growth acquisition to my portfolio.
