I didn’t have to look far to find a high-profile FTSE 100 share trading near its 52-week low. There’s one in my portfolio, staring right back at me, namely global spirits giant Diageo (LSE: DGE).
I like buying top UK blue-chips when they’re down in the dumps, as it’s an opportunity to grab them at a reduced price and bag a higher yield to boot.
Yet it doesn’t guarantee success. Stocks don’t fall for no reason. And there’s no guarantee they will automatically recover either.
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Blue-chip bargain
That applies to a big name like Diageo too, which was one of the most popular stocks on the FTSE 100 for years. It was business as usual until 10 November last year, when the board warned of a shock drop in profits across its Latin America and Caribbean market, which makes up roughly 11% of total sales.
Diageo targets the premium end of the drinks market but hard-up local drinkers have been trading down to the rougher stuff. The Diageo share price crashed 16% in a single day, its biggest one-day drop since 1987. Two weeks later, on 24 November, I bought the stock for 2,872p, but jumped the gun.
Interim results published on 30 January confirmed a thumping 23% decline in first-half Latin America and Caribbean sales, down $310m. Overall, reported net sales fell 1.4% to $11bn, with a foreign exchange impact too.
Personally, I’m down 9.26% but it could be worse. Diageo shares are down 25.59% over 12 months. Should I seize the day and buy more?
Today, Diageo shares trade at 18.09 times earnings. During their glory days, they traded closer to 25 times earnings. Its price-to-earnings ratio’s near a 10-year low, as this chart shows.
Chart by TradingView
The yield’s a modest 3.2%, below the FTSE 100 average of around 3.7%. On the plus side, Diageo’s dividends are covered twice by earnings, and the forecast yield is 3.4%.
Dividend growth recovery stock
As the global economy struggles, sales aren’t suddenly going to pick up. Turning around Latin America and the Caribbean could prove particularly hard, aggravated by an inventory hangover as it’s sitting on a pile of unsold stock.
It doesn’t help that the pound’s strengthening, as this will dilute the value of Diageo’s overseas earnings once converted back into sterling. Gen Z seems to be going easy on the alcohol too, in a generational shift.
There are grounds for optimism though. Once Diageo’s done with destocking, sales could pick up. As could earnings per share, which, as this chart shows, have retreated lately.
Chart by TradingView
On 3 July, broker Citi predicted Diageo shares could re-rate by more than 20% over the next 12-months. That wouldn’t surprise me one bit and I’ll kick myself if I don’t take advantage of today’s reduced share price.
A screaming buy? We’ll know more tomorrow (29 July), when Diageo releases its Q4 earnings. But at the moment, I think it is and I’ll add another splash of the stock to my portfolio the moment I have the cash.
