FTSE 100 beater
Despite the stop-start pandemic, supply chain disruption and rising inflation, Diageo investors have had a great year. At the close of play on Christmas Eve, its shares had climbed 36% in value during 2021.
This gain compares very favourably to the index in which Diageo features. Year-to-date, the FTSE 100 has increased 12% in value. That’s certainly not a bad result for those invested in funds tracking the market return. However, it’s yet more evidence that carefully selected shares (combined with a fair dollop of luck) can prove far more lucrative.
Is the FTSE 100 the best benchmark to use though? Given the dearth of companies similar to Diageo in the UK market, one needs to look abroad. In Europe, Pernod Ricard is up by 33% but Heineken Holdings has climbed just 4% in value. In the US, Brown-Forman has fallen almost 8%.
Given this, I think it’s hard to see Diageo’s performance as anything but stellar. In fact, the stock is now at an all-time high.
Why has Diageo done so well?
A good portion of Diageo’s success can be put down to the fact that cashed-up consumers have treated themselves to premium drinks brands to get them through lockdowns. Another reason has been the company’s decision to continue growing its cash payouts.
Investors have also lapped up the bullish outlook put out by CEO Ivan Menezes. Back in November, Diageo announced that it expected organic sales growth to come in between 5% and 7% from 2023 to 2025. As a comparison, growth of 4% to 6% was achieved from 2017 to 2019.
Still a buy?
Following this year’s solid gains, Diageo’s shares now trade at 30 times earnings. That’s certainly not cheap relative to some shares in the FTSE 100. In fact, it’s far above the company’s own five-year average price-to-earnings (P/E) ratio of just below 24. So, is this stock still worth me buying today?
While I’m not convinced that Covid-19 will disappear in a puff of smoke, a relaxation of restrictions will undoubtedly be good news for the company. Sales at pubs and bars will recover. Investment bank Société Generale believes the company’s growth in the US can continue too. Its price target of 4,500p is 12% up from where we are now.
Naturally, the bear case is very much the opposite of what I’ve just said: the pandemic drags on and savings start to dwindle without the support of a furlough scheme. In such a scenario — and considering the aforementioned valuation — the recent share price action could reverse. Earlier this month, broker RBC set a price target of 3,100p based on its belief that earnings momentum might be slowing amid low consumer sentiment in the US.
Would I buy Diageo’s stock now? I’m not completely against it. I still consider it one of the best in the UK’s top tier, even if the shares do give up some of their gains in 2022.
That said, I do think there’s potentially better value elsewhere in the market, particularly if I were also looking to build a diversified portfolio that could withstand whatever 2022 throws at it.
Diageo isn’t my top stock to buy for 2022 but these are.
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Paul Summers 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.