Enough is enough! This world-class FTSE 100 share is on sale and I’m buying

This well-known FTSE 100 share has stalled over the last four years but still appears to offer amazing value going forward.

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Wall Street legend Peter Lynch once said: “The best stock to buy is the one you already own.” This is how I’m thinking about FTSE 100 share Diageo (LSE: DGE) right now.

Here, I’ll explain why I plan to add to my holding in the drinks giant.

Economic headwinds

In January, Sir Ivan Menezes, the late Diageo CEO, highlighted that Diageo was 36% larger than it was prior to Covid-19. Or more precisely, the company’s global H1 2023 net sales value was 36% ahead of H1 2019 on a constant basis.

I found that to be an impressive figure.

Since then, though, the Diageo share price has declined 15%. And it’s now lower than it was 52 months ago, well before the pandemic set in.

Two major reasons for this pullback seem to be sluggish spirits volume sales in the US and ongoing economic weakness in China. These are very large and important markets, accounting for around 41% of the group’s net sales.

Indeed, Diageo is currently one of the only international alcohol beverage companies to participate in China’s popular baijiu sector. This remains by far the largest spirits category in China, and along with Scotch whisky makes up more than 80% of the firm’s sales in the nation. So, economic challenges there are far from ideal.

Growing global market share

Despite this, Diageo remains on track to take its share of the global total beverage alcohol market from 4% in 2020 to 6% in 2030. At the end of June, it stood at 4.7%, according to new CEO Debra Crew.

This growth is being driven by Diageo’s world-class brands in its three biggest categories. These are whisky, led by Johnnie Walker, the world’s number one international spirits brand. Next is beer, led by Guinness, whose annual sales continue to grow. And finally, there’s tequila, notably Don Julio and Casamigos, the top two category brands globally.

Most tequila sales still come from North America. However, management intends to “take tequila around the world’, and I don’t doubt that could happen. After all, Guinness was once a relatively niche stout beer, but is now consumed in around 150 countries.

A very modest valuation

To my eye, the share price weakness has left the stock looking cheap. The price-to-earnings (P/E) ratio now stands at 19, which is far lower than its average over the past few years.

That is also cheaper than international rival Brown-Forman, the maker of Jack Daniel’s whiskey/bourbon, which trades on a P/E ratio of 38. Diageo’s forward-looking P/E multiple for FY 2025 is now just 17.5.

Also strengthening the investment case here, I feel, is the dividend. It has grown since the 1990s, and the final dividend was recently recently increased by 5%. The current yield of 2.6% is extremely well covered by earnings.

Meanwhile, the company continues to buy back shares, retiring £1.4bn of stock last year and announcing another £800m buyback for this fiscal year. These purchases boost shareholders’ overall ownership.

Finally, Warren Buffett’s Berkshire Hathaway started a $41m stake in Diageo earlier this year. It wouldn’t surprise me to see that position grow over the coming months, given the value on offer.

Either way though, I’ll be personally adding to my own holding in this top-notch FTSE 100 share.

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.

Ben McPoland has positions in Diageo Plc. 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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