Is the Diageo share price due a bounce?

The Diageo share price has had a difficult few years, but with the economy showing signs of improvement, is a recovery overdue?

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Image source: Britvic

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In the chaotic world of investing, where market sentiment can shift almost overnight, finding a stock that offers both stability and growth can be incredibly rare. Enter Diageo (LSE:DGE), a global titan in the alcoholic beverages industry, whose portfolio reads like a who’s who of iconic brands. The Diageo share price has been on the slide for a number of years now, but is it due a recovery? I’ve taken a closer look.

The company

Founded in 1886, the business has been serving up drinks and steady returns to investors for well over a century. Today, with a market cap of £58.6bn, it stands as a heavyweight in the FTSE 100, offering a compelling story of resilience, value, and growth. Admittedly, in recent years, with changing consumer habits and an uncertain economy, things haven’t been going down as smoothly. The share price has fallen over 22% in the last five years alone.

However, good investing is all about spotting opportunities. With the share price now hovering around the £26 mark, a discounted cash flow (DCF) calculation suggests it may be a surprising 31% below its fair value.

Looking closer at the price-to-earnings (P/E) ratio, the firm appears to be trading at decent value compared to peers, with a ratio of 17.6 times, just under the average of the sector. In other words, even in a sector known for its premium valuations, the business may be a relative bargain.

The future

Unlike tech startups promising exponential growth, this company clearly offers something more reliable—steady, consistent expansion. Analysts forecast annual earnings growth of 4.75% for the next five years. While this might not set pulses racing, it’s the kind of measured growth that compounds beautifully over time.

Over the past five years, the company has grown its earnings by a very healthy 7% per year. This track record through various economic climates—from Brexit uncertainties to pandemic disruptions—demonstrates its ability to deliver reliable growth when many others falter.

For income-seeking investors, the firm offers a dividend yield of 3.05%, outstripping many of its FTSE 100 peers. But is this dividend sustainable? With a payout ratio of 55%, it certainly appears so. This suggests that there is more than enough strength in the balance sheet to share profits generously while still retaining enough to reinvest in the business.

Diversity

For me, Diageo’s strength lies in its unparalleled brand diversity. From whiskey and gin to vodka and tequila, it appears to dominate every major spirit category. This isn’t just about having many brands; it’s about having the right ones. Each is a heavyweight in its class.

Risks

High debt levels may give some investors pause. But in the beverage industry, where brands are built over decades, such leverage is common. Companies often use their strong, stable cash flows to finance acquisitions and brand development. With a net profit margin of 19.67% and a history of smart brand building, Diageo seems well-equipped to manage this debt.

Overall

In today’s volatile market, where tech darlings can turn tech duds overnight, Diageo offers something refreshingly different—a business as timeless and reliable as the drinks it sells. With deep value in the Diageo share price, steady growth, generous dividends, and an unmatched brand portfolio, I feel like this one has a long and successful future ahead. I’ll be buying shares at the next opportunity.

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.

Gordon Best has no position in any of the shares mentioned. 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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