Over the last year, the Diageo (LSE:DGE) share price is flat. After the release of its interim results in January, the shares fell by 5%.
Some financial analysts apparently were disappointed with a US sales growth of 3%. Considering that over the last five years the annual average sales growth for Diageo was only around 5%, I do not share that disappointment. For a long-term investor like me, the earnings trend over multiple years is much more important than the short-term earnings noise.
Warren Buffett’s shareholder letter to Berkshire’s shareholders just got released at the end of February as well. It was a very short letter this time. Warren at his old age must think that less is more. I think he wanted to keep it brief but really focus on topics close to his heart. He focused on the “secret sauce” and highlighted two of his stock holdings.
He completed buying Coca-Cola in 1994. Berkshire’s American Express holding was essentially completed in 1995. Both investments turned out to be 10 baggers. In a couple of years, the dividend income of Coca-Cola may be higher than the total initial cost of the Coca-Cola position for Berkshire Hathaway. That is always something like the Holy Grail achievement of investing.
What British stock could be the UK’s version of Warren Buffett’s Coke and Amex holding?
Here, I want to come back to Diageo.
Raise your glasses
My ISA holding of Diageo has more than doubled since inception. One mistake investors make is not buying enough shares of a good stock. I fear I have made that mistake. With the tax year coming to an end in the UK, I am looking to add to my Diageo holding in my ISA and my SIPP account as Diageo could be the UK’s version of Warren Buffett’s Coke and Amex holding.
Luxury stocks have outperformed this year as China has lifted Covid restrictions. Diageo can be seen as a luxury stock as well. The Chinese can be expected to go out more in 2023 and mix expansive cognac and Scotch whisky with Coca-Cola once again while doing so. So Diageo’s Asia sales are likely looking better this year.
Also, Diageo has only really started to buy back its own shares since 2018. Fewer shares remaining of Diageo’s shares outstanding could be good for long-term investors. Nick Train made the same point in the January Factsheet of Finsbury Growth & Income Trust.
On the other hand, the UK corporate tax rate is expected to go up in April. That will shrink the part of Diageo’s income pie available for shareholders in the years to come.
If Diageo can keep growing its profits by 5% a year and return to a price-to-earnings multiple of 30 times in 10 years’ time, there is a chance shareholders like me can make around 22% a year holding its stock. Hopefully Mr Hunt’s UK corporate tax raid will not mess that prediction up. I think it is time for a tipple of the Diageo share price, and I plan to add to my holding. Fingers crossed.
