Diageo’s (LSE: DGE) share price has dropped 25% from its 9 November 12-month traded high of £32.68.
However, my starting point for assessing whether any share might be a bargain is the price-to-earnings ratio (P/E).
On this, the world’s largest spirits maker trades at 18.6, compared to the average 19.9 P/E of its competitors.
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These comprise Rémy Cointreau at 17.4, Constellation Brands at 18.6, Pernod Ricard at 21.3, and Brown-Forman at 22.2.
So Diageo is cheap on this basis.
The same applies to the key price-to-book ratio (P/B) on which it trades at 3.6 against a peer average of 3.8.
To ascertain how much of a bargain it is in cash terms, I ran a discounted cash flow analysis. Using other analysts’ figures and my own, this shows the stock to be 49% undervalued at the present share price of £24.67.
This means a fair value for the shares would be £48.37, although they may go lower or higher than that.
How does the dividend yield look?
In its 2024 results, Diageo raised its total dividend by 5% to 103.48 cents (79p) a share. This gives a current yield of 3.2%.
Analysts forecast that the payouts will rise to 80.8p in 2025, 84.7p in 2026, and 89.7p in 2027.
These would generate respective yields on the current share price of 3.3%, 3.4%, and 3.6%.
The present FTSE 100 average yield is 3.6% and the FTSE 250‘s is 3.3%.
What are its growth prospects?
Ultimately, any firm’s share price (and dividend) are driven by earnings growth.
Analysts’ expectations are that Diageo’s earnings will increase by 1.5% a year to end-2027. This is better than no rise at all, but underlines to me the management’s uncertainty over short-term profit drivers.
On 10 November, the firm released a profit warning based on weak demand in the Latin America and Caribbean region.
This had not been flagged at all before and was instrumental in the huge price drop since that date.
The 2024 results released on 30 July also showed a 3% year-on-year drop in Diageo’s North American organic net sales. This region accounts for 40% of its global sales.
The decline was attributed by the firm to the weak consumer environment, and this remains a key risk for it, I think.
Worse still from my perspective is that there was no indication in the results as to when these soft conditions might end. Previously in a 30 January conference call, CEO Debra Crew indicated the turnaround could take six to 18 months.
Is the stock an unmissable bargain for me?
Technically, Diageo is a major bargain, which is a positive factor for me. Another is that it does pay a reasonable dividend that is predicted to rise.
Right now though, I am at a point in my investment cycle in which I am focusing on high-yield shares. The idea is that they generate sufficient dividends for me to further reduce my working commitments and live off those.
Consequently, it is not unmissable for me at my point in life.
Even if I were 10 years younger, I would want to see clear growth strategies emerge from management before I considered buying it.
