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Should I add Diageo stock to my portfolio?

Cans of Tanqueray sit in an ice bucket
Image: Diageo

Multinational drinks powerhouse Diageo (LSE: DGE) has had a strong run over the past 12 months, rising 32.5%. This growth was in the wake of the March 2020 stock market crash and placed Diageo as a standout FTSE 100 stock for the year.

Currently, Diageo shares are trading at 3,538p, dipping slightly from their August highs of over 3,600p. So, is now a good time to add Diageo stock to my portfolio? Let’s take a closer look.

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Promising results

The 2021 Annual Report released last month contained some very encouraging metrics. Operating profit was up 75% to £3.7bn and net sales rose 8% to £12.7bn. Organic profit was also up 17.7%, outperforming the 14% target set at the start of the year.

2020 was a tough year for most businesses, so these numbers are to be expected year-on-year. However, in the last six months of 2020, organic sales rose 1%. This highlights to me that the firm was able to deliver positive results in the face of huge macroeconomic uncertainty, which is great news for Diageo stock, I feel.

In addition to this, it made a number of interesting acquisitions over the past year. Notable acquisitions included Loyal 9 and Aviation Gin. Capitalising on up-and-coming brands like this is essential if it wants to remain a frontrunner in the industry.

Another encouraging point was that more broadly, alcohol e-commerce sales were up 45%. Diageo has been able to capitalise on this with online sales rising 70% in the past year. This expansion has been in key markets in the UK, Germany, and China, all massive alcohol markets. A growing business like this is good news for Diageo stock.

Diageo stock value

Diageo stock currently trades on a price-to-sales (P/S) ratio of 6.48. Comparing this to competitors Heineken and Carlsberg that trade on 2.95 and 0.39 P/S ratios respectively, it begs the question of whether the current Diageo share price is too high? I thought it could be when I last covered the stock, however, it has since risen over 200p. Although the price has risen, the continuously encouraging results lead me to believe the stock could push higher. Also, perhaps investors don’t mind the fact that Diageo stock is overvalued on paper. I’m starting to feel that way myself due to its strong performance. If this is the case it could keep pushing higher.

Long-term outlook

Here at The Motley Fool UK, we like to think long term. Looking at Diageo stock, I believe it could be a good long-term investment for my portfolio.

Diageo saw a strong rebound in 2021 and the back end of 2020. The firm’s open attitude towards acquisition is also attractive to me. The existing portfolio of products Diageo already has also gives me long-term confidence. People are going to be drinking household beverage names such as Smirnoff and Baileys for years to come.

Finally, the lofty valuation seems to not be worrying investors. All things considered, I like the look of Diageo stock and would consider adding it to my portfolio today.

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Dylan Hood has no position in any shares mentioned above. 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.

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