After a strong 2021 recovery, the Diageo (LSE: DGE) share price has since fallen. It’s now lower than before the Covid crisis.
Does that give us a great opportunity to buy now, and secure some long-term value?
Looking at the firm’s interim results released on 30 January, I think that might be a yes.
Strong cash generation
The booze giant spoke of a “challenging first-half environment.” Things have been a bit tough, but really not too bad.
Diageo reported an organic net sales fall of $67m, which is just 0.6%. But there was a much bigger 23% drop in the Latin America and Caribbean zone.
Still, even in such tough conditions, the firm saw a £0.7bn rise in net cash flow, to $2.1bn.
Safety stock
If that’s what Diageo can rake in when times are tough, it makes me think it could be a good long-term buy. In fact, I’ve always thought that, but hard times are when the best companies often shine.
Diageo upped its interim dividend by 5%, and has completed a £0.5bn share buyback. That doesn’t seem too bad for a “challenging” half to me.
CEO Debra Crew spoke of a progressive dividend policy, and predicted “improvement in organic net sales and organic operating profit growth” in the second half.
Buying opportunity?
I love it when a global megastar like Diageo suffers short-term problems in one of its markets, like this Latin America thing. It can so often lead investors to overreact.
In the long-term, this is a global brands powerhouse. Johnnie Walker, Smirnoff, Guinness… are just part of its portfolio of more than 200 brands, sold in nearly 180 countries. So, only 15 or so more countries to go… though a few might be a bit tough to crack.
This is also a company that rakes in more than $20bn in annual net sales.
Does that look like a safe long-term investment or what? I mean, a lot of the labels its big sellers compete against are… more Diageo brands.
Weak dividends
It’s not all sweetness and light, mind. When a company has such a commanding presence in its markets, the share price tends to get a boost.
We saw the price-to-earnings (P/E) ratio reach 30 in 2021. That’s the kind of valuation that might not have much safety room… as we’ve since seen.
It also tends to mean a lower dividend yield. In this case, we’re looking at a modest 2.8%.
Why would I want that, when I can find banks with yields of 5%, 6%, 7%…? Other top FTSE 100 stocks offer even more than that.
Long term
Still, I reckon Diageo could make a nice addition to an ISA to provide a bit of diversified safety. And I rate it as a stock to consider buying on the dips.
We have a dip right now, and it tempts me to buy… But can I tear my eyes away from those cheap banks? I’m not sure I can.
