What’s happened to the Diageo (LSE: DGE) share price? It’s turned from a fizzy cocktail of joy into a tray of yesterday’s slops. And one profit warning was all it took to affect this dismal transformation.
I didn’t see it coming. Diageo shares had been rattling along happily for years. I’d spent most of that time waiting for a dip, because they looked pricey, trading 25 times earnings. That bit I got right.
The bit I got wrong was to dive in and buy the shares on 24 November last year. That was two weeks after the board had issued a profit warning following a shock drop in Latin American & Caribbean sales. Diageo shares were down about 20% when I rocked up thinking I was bagging a bargain at 2,808p per share.
Can this FTSE 100 stock recover?
Instead of recovering the shares slid further but I stuck to my guns and averaged down at 2,567p on 28 August. Another wrong move. Today, Diageo shares trade at 2,400p and I’m down 14.07%. Over 12 months, the Diageo share price has crashed 24.42% and 36.21% over two years. But that isn’t what worries me most.
I bought Diageo thinking it was suffering from a single issue in a specific overseas market. Cash-strapped Latin American drinkers were trading down to cheaper brands, while Diageo had overstocked after getting its inventories in a muddle. I thought it would right itself, given time.
Local difficulties are always to be expected with a sprawling global brand like this one. But I had one lingering worry, which is coming into focus today.
Alcohol has always been seen as a defensive sector. In the past, people carried on drinking, even in a recession. Some increased their intake, to drown their sorrows. This argument no longer holds for two reasons.
Sticky investment sector
First, Diageo’s decision to focus on the premium end of the spirits market. People may still be drinking in a downturn, but they drink cheaper rather than better. As broker RBC Capital said on 12 August: “The ‘affordable luxury’ investment case is threadbare”.
My second, bigger worry is that Gen Z’s rethinking its entire relationship to alcohol. For some, it’s about health. Others are short of cash. Many don’t want their drunken antics to haunt them for life on social media.
Diageo’s some exposure to the alcohol backlash through its zero-alcohol Guinness, which I’ve tried and is astonishingly good. But it’s primarily a spirits producer and, in my view, alcohol-free Johnnie Walker isn’t going to fly. Booze-free Baileys is just milkshake.
Today, Diageo looks good value by its former standards trading at 18.2 times earnings, while yielding a halfway decent 3.33%. However, it’s not hard to find FTSE 100 stocks with lower valuations, higher yields and fewer existential risks.
The doom and gloom may have been overdone. Diageo could be in a much better place this time next year, particularly if global economies pick up. I’ll hold what I’ve got but won’t buy more today.
