2023 was something of a mixed bag for stock markets. Amid tough macroeconomic conditions, many FTSE 100 stocks struggled to deliver solid returns. The index itself finished the year with almost flat returns.
One stock that was caught up in this was Diageo (LSE: DGE), with its share price falling 23% throughout the year. Broaden that horizon to five years, and the shares have fallen too, albeit only by 2%. So why am I considering buying this stock? Let’s take a closer look.
Quality business
The name Diageo may not be as well known as some of its famous labels, but the multinational alcoholic beverage company boasts some of the biggest names in the industry. They include Johnnie Walker, Smirnoff, Guinness, Captain Morgan and Baileys.
Owning this suite of brands gives the company huge pricing power. Demand is consistently high and there’s minimal established competition for many of them. What’s more, alcohol isn’t a cyclical business. In other words, regardless of market conditions, people enjoy a drink.
Given this large demand, the company can rake in impressive top-line figures. For example, last year it reported revenues of almost $24bn, with net income of $3.8bn. The strong earnings level has allowed Diageo to pay shareholders for 36 years running. Past performance is no indication of future returns, but stats like that are very enticing for prospective investors like me.
That being said, the current dividend yield is only 2.8%, which is below the market average. In addition to this, the valuation still looks a bit on the steep side to me. The shares are currently trading at a price-to-earnings ratio of 17, which is a slight premium to the FTSE 100 average of 14.
Challenging outlook
The company faces a few risks to its earnings, particularly in some of its international markets. For example, in its November trading update, it pointed to “a materially weaker performance outlook in Latin America and the Caribbean”, which could serve to dampen profits.
More widely, with global markets recently enduring red-hot inflation, outlooks remain mixed. In the UK, for example, interest rates are expected to remain high for most of 2024. This could dampen consumer demand for some of Diageo’s more expensive brands. That being said, with such a strong brand arsenal, I don’t expect this to be a major issue.
To try and ‘futureproof’ its business, Diageo recently appointed a “breakthrough innovation team” to lead advancements beyond product development. Such teams are a great way of expanding offerings to new markets, as well as broadening products and services. Given the hazy market outlook, I think this is a great move by the firm.
What I’d do now
Overall, I like the look of these shares right now. Given the 23% decline last year, I think now could be a good time to buy the stock for long-term growth. If I had some spare cash lying around, I’d be adding it to my portfolio today.
