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Can the Diageo share price keep flying?

Shelves holding drinks bottles
Image source: Getty Images.

I’ve often thought of Diageo (LSE: DGE) as a stock for both good times and bad. Drink to celebrate, drink to commiserate, you know the kind of thing I mean. Well, that’s for normal good and bad times, not times so bad they shut all the bars and restaurants. The Diageo share price crashed when Covid-19 hit, along with all the rest.

But as the doors have been opening and the thirsty hordes have been rushing back to get their glasses filled, things have been looking a lot better. Over the past 12 months, Diageo shares are up 33%, compared to a 19% gain for the FTSE 100. The recovery has more than made up for the 2020 pandemic crunch, with an overall gain of 11% over the past two years.

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Over the longer term, the Diageo share price has put a fair bit of cash into investors’ pockets. It’s up 60% over the past five years, and 180% over 10. Oh yes, and there have been dividends too. Diageo has been averaging yields of around 2.5% in recent years. That’s far from the best the FTSE 100 has to offer. But on top of that cracking share price growth, it’s a very tasty bonus.

So never mind just thinking whether I should buy Diageo shares now, I’m wondering if I can afford not to. I’m also asking myself why I didn’t buy on any of the occasions over the past decade when I came very close, but for one reason or another didn’t.

More top growth to come?

Anyway, that’s the past, so what about the future? Well, I’ll tell you one party that thinks the Diageo share price is good value now — Diageo. That’s right, the company itself is hoovering up its own shares. It’s been doing so since May, when it resumed its capital return programme.

The company had previously been returning cash through share buybacks, in a programme that started in July 2019. Then along came Covid-19, and the whole thing was delayed and extended. The plan, to return up to £4.5bn, has restarted and is still ongoing.

But there’s got to be a downside, hasn’t there? Well yes, it’s that annoying thing called valuation. Diageo shares have always commanded a high valuation, and I think that’s fully justified. It owns so many top brands, of premium products that are always in big demand. There’s Guinness, Smirnoff, Johnnie Walker, Gordon’s, and all the rest. How could anyone compete with those?

Diageo share price valuation

In a recent update, chief executive Ivan Menezes said: “We have made a strong start to fiscal 22, with organic net sales momentum across all regions.” If that should translate to a return to a 2019 level of earnings, we’ll be looking at a P/E of about 27 on the current Diageo share price. That’s pretty much where the valuation was in 2019, so it very much looks like business as usual.

I can’t help thinking that represents a fully valued stock, mind. So there might not be any post-pandemic recovery left and we could be in for a year of going nowhere. There are also some far more attractive dividend stocks out there right now. Still, I just can’t take Diageo off my list of buy candidates, not with that track record.

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Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies still trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

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Alan Oscroft 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.

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