Down 16%, should I rush to buy shares in this FTSE 100 Dividend Aristocrat?

Shares in this Dividend Aristocrat are trading at a 52-week low. So should Stephen Wright start making room in his portfolio for Diageo shares?

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It’s rare to find shares in a Dividend Aristocrat trading at an attractive price. But with the Diageo (LSE:DGE) share price down 16% over the last 12 months, could there be an unusual opportunity for investors right now?

The FTSE 100 drinks company has seen its sales volumes decline this year, especially in its key US market. But the main issues facing the business look like short-term headwinds to me.

Declining sales volumes

The main reason Diageo shares have been struggling this year is that the underlying business has struggled to generate the kind of revenue growth needed to justify its high price tag. Net sales growth halved from 21.4% to 10.7%.

Furthermore, pretty much all of this growth was due to price increases. In some ways, that’s a positive thing – it shows the company’s brands have enough pricing power to offset higher costs. 

On the other hand, the volume of products sold over the last 12 months declined in almost all of Diageo’s key geographies. Most notably, volumes in the US (which accounts for 39% of net sales and 62% of operating profits) fell by 4%.

Analysts at Morgan Stanley saw this coming back in July. They forecasted that higher inventories built up during the pandemic would cause sales growth to slow and this would take at least a year to normalise.

If they’re right about this, then Diageo could have to contend with slow sales volumes for a while yet. And that might mean the share price still has further to fall.

A buying opportunity?

As an investor, I’m interested in how much cash the company is going to generate in the future. The idea that earnings might be lower over the next year is therefore something I should take seriously – lower profits mean lower returns for shareholders.

Excess inventory looks like the kind of issue that will resolve itself relatively quickly, though. And this means there might be an opportunity for me as an investor looking to buy the stock today and hold it for the long term.

Once inventory levels normalise – in around a year or so, according to the Morgan Stanley analysts – things should start looking up. And an investor might stand to benefit from improved returns having bought the stock today at a discount.

The recent sell-off might take the stock to a 52-week low, but it’s not at an obvious discount to its historic levels. At the moment, the share price is roughly where it was in March 2019.

Over the last few years, demand for Diageo’s spirits has surged and then normalised and the share price has done the same thing. This makes sense to me, but it means I don’t think the stock is at a historically attractive valuation at the moment.

Foolish takeaways

Any business that achieves 25 years of consecutive dividend increases is clearly a quality company. And this is easy for investors to see, which is why Dividend Aristocrat stocks don’t usually trade at bargain prices.

In the case of Diageo, I don’t think the recent sell-off makes the stock an unmissable opportunity. But the underlying business is clearly a resilient one and I expect it to serve its shareholders well for a long time to come.

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.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo Plc. 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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