It’s been a tough few months for shareholders in drinks giant Diageo (LSE: DGE). But the latest dividend forecasts for it mean that this FTSE 100 stock is now on my radar as a possible buy.
I think this high-quality business may be offering a rare opportunity for long-term investors to consider buying at an attractive valuation. Here’s why.
Diageo dividend forecasts
City analysts expect the owner of Johnnie Walker and Tanqueray to deliver a payout of 80p per share for the 2023/24 financial year. That gives a dividend yield of almost 3%.
Those same broker forecasts suggest that the company’s 25-year record of dividend growth will be maintained in 2024/25, with a payout of 84p per share. That could give a yield of 3.1%.
These dividend yields are not particularly high compared to some FTSE stocks. Indeed, the index itself offers an average yield of about 3.8%.
However, a 3% yield is above average for Diageo. High profit margins and a long history of growth mean that the shares have historically commanded a premium valuation.
My research suggests that the last time Diageo yielded more than 3% was in 2015. Before that it was in 2011.
I think the current share price weakness may offer a buying opportunity. But it’s important to note that this business is facing some headwinds at the moment.
Destocking fears
The share price fell sharply in November when new chief executive Debra Crew surprised investors with a profit warning.
Ms Crew said that sales in Latin America and the Caribbean (LAC) were expected to fall by 20% during the second half of 2023, reversing a big gain seen last year.
The problem seems to be that Diageo’s distributors in the LAC region have seen local sales slowing. As a result, they’ve been left with too much stock, so are ordering less than expected from the firm.
Assuming drinkers in these markets aren’t permanently cutting back, this should just be a temporary problem. But I think there’s a risk things could get worse before they start to improve.
Why I might buy
Destocking problems have affected Diageo before, but the business has always returned to its long-term growth trend eventually.
As the world’s largest spirits producer, the group has an impressive and valuable portfolio of brands. This portfolio is paired with global marketing and distribution networks that give the company access to pretty much all of the world’s population.
These factors have driven consistent growth for many years and provide a substantial defensive moat for the business, in my view.
Last year’s share price slump means that Diageo shares are trading on 18 times 2023 forecast earnings. By my reckoning, that’s the lowest level since about 2012.
Although I can’t rule out further problems in the short term, I think a reasonable amount of bad news is already priced into the shares.
For investors looking for reliable, long-term income growth, I think the shares could offer value at current levels. Diageo is on my list as a possible buy.
