Should I buy shares in FTSE 100 alcohol stock Diageo (LSE:DGE)?

FTSE 100 alcohol stock Diageo (LON:DGE) is enjoying a share price rally. Is this a good long-term investment and is it meeting ESG objectives?

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

FTSE 100 stock Diageo (LSE:DGE) is doing well, and with the reopening under way, this seems set to continue. When Covid-19 struck, wholesale alcohol sales took a hit, but home consumption compensated. Ready-to-drink cocktails have been proving popular, and Diageo is expanding its offerings here.

The Diageo share price climbed between March and June last year but had lost most of its gains by October. Since then, it has rebounded 39%.

Potential takeover target?

Back in 2015, an article about a possible bid sent Diageo’s share price soaring. The potential bidder was 3G Capital Partners, in which billionaire investor Warren Buffett has a stake. Nothing was ever confirmed, and Diageo called it “market speculation and rumour”.

3G Capital Partners had missed out on acquiring Unilever for $143bn in 2017. So, could it potentially look in Diageo’s direction again?

The amalgamation of big brands is becoming a popular way to build a powerhouse. And private equity is getting in on the action. 3G Capital already acquired Kraft Heinz and Restaurant Brands International. Plus, it has significant stakes in Singaporean internet company Sea, and online used car retailer Carvana, among others.

I think Diageo is is n attractive target as it’s a force to be reckoned with. It’s grown considerably since 2015. But at £80bn, its market cap is lower than Unilever’s. I wouldn’t rule it out as a takeover target.

Loyalty pays off

But I’m a long-term investor and I think DGE scores here too. Loyal shareholders who’ve stuck with Diageo over the past seven years enjoyed a rising dividend and benefited from share buybacks. The pandemic put a temporary halt to the dividend. And today Diageo shares are still slightly below their 2019 high. But I think it has scope for climbing further as the hospitality sector reopens.

In its May update, the company said it expects organic operating profit growth to reach at least 14% this year, beating analyst expectations. This led it to resume its return-of-capital scheme, which should deliver £1bn in shareholder payments by the end of next year, including £500m in share buybacks before November 2021.

Sustainability focus

Some 80% of Diageo’s carbon footprint comes from heat, mainly through its brewing and distilling operations. To offset this, it’s been making sustainability moves. These include planting trees to restore landscapes and a paper bottle launch later this year.

It’s also integrating sustainability, inclusion and positive drinking messages into each of its brands. I think this goes a long way to building consumer loyalty and longevity in brand awareness. For instance, linking Guinness with women’s rugby, and Smirnoff with PRIDE.

Risks to shareholders

While I like the look of Diageo’s future, shareholder risks remain. Inflation or a trade war would impact sales, the travel sector is an important money-spinner for the company and has not yet resumed full capacity. Plus, a focus on health could deter consumers from drinking alcohol. I think this unlikely, but it’s still a risk. 

But as a global operation servicing multiple sectors, it has a significant advantage. Diageo is at the forefront of the growth of ready-made drinks which is also driving the sector today. Its outlook is positive, the share buyback is a plus and its track record is excellent. I’d add Diageo shares to my Stocks and Shares ISA.

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 assessed. Consider taking independent financial advice.

Kirsteen 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.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

6.9% dividend yield! 2 cheap stocks to consider for a £1,380 passive income

Looking for a market-beating passive income? These FTSE 100 and FTSE 250 dividend stocks could provide a healthy second income…

Read more »

Mature black couple enjoying shopping together in UK high street
Investing Articles

Potentially 34% undervalued, should I be watching the boohoo share price?

The boohoo share price has seen a rocky few years, but with signs that the economy is improving, could this…

Read more »

Investing Articles

Is the Amazon share price primed for a drop?

The Amazon share price has been on a tear for the last year, but can this trend continue? Gordon Best…

Read more »

Photo of a man going through financial problems
Investing Articles

Down 15% in a week! What’s gone wrong with the National Grid share price?

The National Grid share price isn't supposed to crash but now it has. Harvey Jones is wondering whether to take…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

Taylor Wimpey just paid me £158.78. I’m aiming to turn that into a £100k yearly second income

Harvey Jones says small, regular dividend payments can turn a few pounds into a mighty second income, if he gives…

Read more »

A pastel colored growing graph with rising rocket.
Value Shares

These FTSE 250 shares are tipped to rise 14% to 18% in the next year!

Looking for the best FTSE 250 momentum shares to buy? Here are two that City analysts expect to soar in…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Lloyds’ share price is up 20% in 3 months! How high can it go?

Lloyds’ share price has ripped higher recently. Here, Edward Sheldon provides his view on the level it could potentially climb…

Read more »

Investing Articles

Why the Rolls-Royce share price could continue to outperform

The Rolls-Royce share price keeps moving forward, but this Fool thinks it's still behind where it ought to be after…

Read more »