I’m pondering whether to add Diageo stock to my portfolio, as the storm clouds of global economic turmoil gather.
Diageo is a London-based behemoth in the alcoholic beverages industry, renowned for household names like Guinness, Smirnoff, and Johnnie Walker.
And although past performance is no guarantee of future results, it has proven itself to be remarkably resilient during previous economic downturns.
Bottled resilience
So, what makes Diageo potentially a fortress against economic downturns?
Let’s start with its industry. The booze business has a long history of weathering financial storms. Even when times are tough, many still find solace in a glass or two. That makes Diageo’s extensive product range – from luxury to affordable – a reliable choice for consumers of all stripes.
During the 2007-08 financial crisis, while many companies were floundering, Diageo saw its revenues climb from £7.26bn in 2006 to £9.94bn in 2010.
During the pandemic era, the story was much the same. Revenues dipped only slightly, by 8.7% to £11.8 billion, in 2020. By June 2023, the company’s revenues had rocketed to a jaw-dropping £17.1 billion.
Raising the bar and the shares
But there’s more. Diageo recently kicked off a $1bn share buyback programme, a strong indicator of its financial health and optimistic future outlook.
Moreover, CEO Debra Crew is bullish about the company’s ability to tackle ongoing macroeconomic challenges, expecting “a gradual improvement on both organic net sales and operating profit growth” in the coming fiscal year.
Poring over the figures
I don’t need to down a shot of Captain Morgan to appreciate the strong performance of Diageo’s financials.
With a market capitalisation of £68.5bn and an enterprise value of £83.86bn, the company is a heavyweight in the drinks industry. Its profit margin stands at an impressive 21.8%.
However, it’s crucial to note a couple of risks. Firstly, the company’s total debt is £17.3bn, which could be a concern given how interest rates have shot up since 2022.
Secondly, the stock has a trailing price-to-earnings (P/E) ratio of 18.5, which looks a little steep and leaves it at risk of a correction if results disappoint.
What’s the verdict?
Yet I feel Diageo’s historical resilience, diverse product offerings, and healthy margins make it a tantalising option for my portfolio.
The company isn’t trading at basement-bargain valuations, but I don’t mind. In the wise words of Warren Buffett: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” I believe this perfectly encapsulates the investment case for Diageo.
Given its robust financials and historical resilience, I’m convinced that Diageo will serve as a financial bulwark in my portfolio. I plan to add some shares as soon as I have some spare cash.
