Diageo shares rise but could this reopening play make further gains?

Diageo shares have performed well in the last year. Could further reopenings see this stock continue its run-up or has it run its course?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

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.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Ben Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

More on Investing Articles

A beach at sunset where there is an inscription on the sand "Breathe Deeeply".
Investing Articles

IAG shares fall again! Is this stock now too cheap to miss?

IAG shares have not been kind to shareholders this year. And losses were compounded on Thursday amid more bad news.

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

3 reasons to buy investment trusts

Investment trusts have been paying out the biggest total amount of dividends in history. Our writer explains why he would…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Why I’d use a spare £1,000 to buy shares and start building wealth

If our writer had a spare £1,000 right now, he would consider using it to buy shares. Here is why…

Read more »

Female Doctor In White Coat Having Meeting With Woman Patient In Office
Investing Articles

Here’s why the Renalytix share price is tanking

The Renalytix share price has lost almost 90% of its value in one year. Our writer is a shareholder --…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Could I make big buck with cheap Aston Martin shares?

Aston Martin shares plunged nearly 10% on Thursday morning amid rumours of another capital raise. But, maybe now is a…

Read more »

Risk reward ratio / risk management concept
Investing Articles

A top penny stock to buy in July

Penny stocks can carry higher risk for investors than larger companies. However, here is one low-cost UK share I think…

Read more »

Business development to success and FTSE 100 250 350 growth concept.
Investing Articles

Why 2022 could turn out a great year for buying growth shares

The appetite for growth shares appears to have waned in 2022, as the US Nasdaq has hit a bear market.…

Read more »

Piggy bank group pastel color background
Investing Articles

Should I buy PayPal stock in July?

The PayPal share price has fallen quite a long way from its all-time high. So, could July present a buying…

Read more »