It’s been a rough five years for Diageo (LSE: DGE) shareholders. During that time, its shares have lost 30.3% of their value. They’ve risen as high as £40.36 but they’re at one of their lowest points in five years right now, sitting at £23.57.
That’s not inspiring stuff from the alcohol beverage giant. I like to buy stocks that are gaining momentum but still look cheap. When it comes to gaining momentum, Diageo must have missed the memo.
But while its share price performance has been dire, I think there’s still a lot to like about the business. Could the FTSE 100 stock, now trading on 17.2 times earnings, be a no-brainer buy?
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A rough spell
It hasn’t been an easy couple of years for the company. Weak consumer spending has impacted its share price. The business issued a profit warning earlier this year after sales in the Latin American and Caribbean region fell 21%.
With the ongoing cost-of-living crisis, consumers have been searching around for cheaper alternatives or even cutting out alcohol altogether. Unfortunately for shareholders, it seems like this will continue to be the case in the coming months.
Long-term performance
But there are two reasons I reckon the stock could be a no-brainer buy. The first is due to the premium brands it owns.
Yes, consumers have been tightening their belts. But with names such as Guinness, Captain Morgan, and Don Julio under its umbrella, I still back Diageo to perform over the long run.
As interest rates are cut, spending will pick up again. What’s more, although it has been a source of concern recently, in the years and decades to come, it’s predicted we’ll see strong economic growth in regions such as Latin America and the Caribbean. That should further help boost spending.
Rising yield
Reason number two is that its falling share price has pushed up its dividend yield. Today, it sits at 3.4%.
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On paper, a yield of that size may not seem like anything to write home about. However, there’s a caveat.
Diageo is a Dividend Aristocrat. It has been nearly four decades since the business hasn’t paid a dividend. At times during those 37 years, we’ve experienced plenty of turmoil in the stock market. So, its consistent payout is mighty impressive.
When it comes to dividends, some investors may feel like chasing the highest payout is the smartest way to make gains.
However, people who bought Vodafone for its meaty 11.1% would have found out this often isn’t sustainable. The telecommunications giant announced earlier this year its dividend will be slashed in half from next year.
Dividends are never guaranteed. So, at least with a track record like Diageo’s, I’m confident the business will keep prioritising shareholder returns in the years to come, despite the challenges it may face.
I’d buy
Don’t get me wrong, Diageo will be a slow burner. In the months ahead I expect further volatility and its share price may continue to put up an uninspiring performance.
But as an investor who focuses on the long term, that doesn’t bother me all too much. Despite tough trading conditions, I back Diageo to get back on its feet. If I had the cash, I’d snap up some shares today.
