After a 40% decline, is this FTSE 100 stock too cheap to ignore?

This FTSE 100 stock keeps falling, but is it really cheap? Roland Head takes a look at this remarkable business and gives his verdict.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 stock I’m looking at now has fallen by 40% since hitting record highs in early 2022.

The company is drinks giant Diageo (LSE: DGE). This £50bn firm owns brands including Johnnie Walker, Guinness and Smirnoff, plus many high-end whisky and tequila brands.

Drinkers poured doubles during the pandemic and spent more money on premium spirits. Diageo reported record profits in its 2022/23 financial year.

Should you invest £1,000 in ITV right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if ITV made the list?

See the 6 stocks

However, the party’s now come to an end. Long-term shareholders have been left with a serious hangover. Diageo’s share price has fallen from a 2022 high of £41 to less than £25, at the time of writing.

Created with Highcharts 11.4.3Diageo Plc PriceZoom1M3M6MYTD1Y5Y10YALL6 Apr 20204 Apr 2025Zoom ▾Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '2520212021202220222023202320242024202520251500200025003000350040004500www.fool.co.uk

Cutting back on booze

After three years of high inflation, cash-strapped consumers are buying fewer bottles of spirits and they’re choosing cheaper brands.

Diageo’s results for the year to 30 June showed a 4% reduction in volumes last year. Within this, sales of its value brands rose by 5.4%, while sales of its super-premium brands fell by 6.7%.

The worst falls were seen in the Latin America and Caribbean region, where a stock overhang triggered a profit warning last year. Another potential risk is the US market, where there are growing signs of a consumer slowdown.

Why I think Diageo could be cheap

Diageo has a broad portfolio of brands and is able to adapt to changing consumer tastes. I think spending will recover, over time. Indeed, as a long-term investor, I think the current weakness is more likely to be a buying opportunity.

Companies with Diageo’s quality metrics are often very expensive. Last year’s results showed an operating profit margin of 29% and a return on capital employed of just under 17%.

These above-average figures highlight the company’s ability to generate value for shareholders, while still investing in growth.

In my view, Diageo’s strong profitability’s probably the main reason why the shares have beaten the FTSE 100 over the last 10 years, despite the share price slump over the last 18 months.

Looking ahead, Diageo shares are trading on a 24/25 forecast price-to-earnings (P/E) ratio of 16 with a dividend yield of 3.4%. That’s relatively cheap for a business of this kind, in my experience.

What could go wrong?

Diageo reported net debt of three times EBITDA (a measure of profits) at the end of June. That’s slightly above my comfort zone. I’d prefer to see leverage between 2x and 2.5x. However, it wouldn’t stop me investing, given Diageo’s high profit margins.

The other risk I can see is that a recovery could take longer than expected. This could carry an opportunity cost – maybe I could make more money investing elsewhere?

What I’m doing

I think Diageo’s likely to remain a high-quality business with strong brands and good cash generation. At current levels, the shares look good value to me and the 3.4% dividend yield’s within my buying range for this kind of business.

I haven’t made a final decision yet. But Diageo’s certainly on my shortlist to consider as a possible addition to my long-term income portfolio.

Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

Roland Head 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.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »