Earlier this week, filings showed that billionaire investor Warren Buffett had been further reducing his stake in Bank of America. This is increasing his cash pile, which sat at a whopping $277bn in the latest quarterly earnings. However, he does hold one FTSE 100 company in his portfolio which makes for interesting consideration.
Details to consider
Buffett holds just under 228,000 shares in Diageo (LSE:DGE) which equated to a purchase value of $40.2m. This purchase was made back in Q1 2023 and since then hasn’t altered his position at all.
As a point of clarity, the shares were purchased via Gen Re, an insurance company that sits within his portfolio. Yet it’s still valid to say that Diageo is part of the overall stock portfolio controlled by Berkshire Hathaway.
Diageo shares are down 25% over the past year. Fortunately, a holding this size for Buffett isn’t actually a big deal, given multi-billion holdings in other stocks like Apple. Of course, when the Q3 earnings report comes out, it might show that Diageo shares have been sold. Yet as far as we’re aware right now, the global beverage manufacturer is still included.
Why I could consider buying
Some flag up that Diageo shares now offer an attractive value buying opportunity. Last month, analysts at investment bank Citigroup said they believe the stock could do well from here. They added that there’s “scope for second half of 2025 organic growth to accelerate” and that it’s “time to revisit what remains an attractive compounding mid-term growth story”.
It’s true that the latest results did offer some reasons for optimism. For the first half of this year, the firm managed to grew or hold total market share in over 75% of total net sales in measured markets. This included in the US, an important area for the company.
Further, it managed to have record productivity savings of nearly $700m during the period. This will help to reduce costs at a time when revenue, due to weak consumer demand, is falling.
Risks right now
The big risk of me buying Diageo shares now is that consumer sentiment stays weak for the foreseeable future. Even though the main area of decline is Latin America and the Caribbean, it’s a large enough area to cause a financial impact. Therefore, even though geographical diversification is a benefit, it doesn’t mean that companies are immune to taking a hit from one area.
The price-to-earnings ratio is also quite high at 18.92. I’d expect that, after a fall of the magnitude we’ve seen in the past year, this ratio should be lower. A lower ratio’s often seen to indicate better value. So this could highlight that it isn’t a bargain basement purchase for me to consider.
In this case, I can’t see a compelling enough reason to buy Diageo shares right now. Time will tell if the stock remains in the Berkshire Hathaway pot, but it’s not time to put it in my (much smaller) portfolio.
