The Diageo (LSE: DGE) share price is up almost 10% since 6 September. Ring the village church bells!
To be fair, it’s about time the FTSE 100 stock started bouncing back. All it seems to have done is trend downwards for the past two years. And even after this jump, it remains 35% below the 4,036p level recorded at the beginning of 2022.
What’s caused this sudden spike?
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A brief update
Diageo’s annual shareholder meeting took place yesterday (26 September). Ahead of this, the spirits giant put out a brief statement saying that trading was going as expected so far in FY25.
Given that Diageo’s new financial year only started in July, I’d have been worried if it said that wasn’t the case.
CEO Debra Crew commented: “We have made good progress on our strategic initiatives… I believe that the fundamentals for total beverage alcohol, and particularly the spirits industry, remain strong and am confident that when the consumer environment improves, growth will return and the actions we are taking will position us well to outperform the market.”
These strategic initiatives include restructuring its Nigerian business model and improving its sales and distribution channels in the US.
However, Crew also warned of “cautious” consumers and a “challenging” environment for Diageo and the spirits industry. So the prospect of sales weakening in the months ahead cannot be ruled out.
Luxury brand rally
The stock rose 4.6% yesterday. But it probably wasn’t this news that was responsible. Instead, it seems to have been lifted by the huge surge in European luxury stocks fuelled by China’s economic stimulus package. Many luxury companies rely heavily on Chinese consumer spending.
Last year, Diageo’s net sales in Greater China increased 12%, primarily driven by strong growth in Chinese white spirits. It also owns a 34% stake in the Moët Hennessy drinks division.
As a long-suffering shareholder, I’ll toast any rally the stock experiences these days!
A smart acquisition
In other news earlier this week, the company announced that its North American arm had acquired Ritual Zero Proof. This is the leading non-alcoholic spirits brand in the US, and the sixth largest globally.
From what I read, Gen Z still likes “Instagrammable” environments (trendy bars and festivals), but not the hangovers and “hangxiety” the morning after alcohol. I can’t fault them, to be honest.
In the US, the non-alcoholic beverage category has seen impressive retail sales momentum, with a compound annual growth rate exceeding 31% over the past five years. In the UK, Diageo’s Guinness 0.0 has leapfrogged Heineken 0.0 to become the most popular alcohol-free beer.
This latest acquisition cements Diageo’s position as the leading zero-proof spirits player globally. It should capture an outsized proportion of this growing market.
I’m holding on
Looking ahead, the firm still has its challenges. More young people in the West are avoiding booze and cash-strapped Latin American drinkers have been trading down from Diageo’s premium-priced tipples.
But there’s a 3.1% dividend yield on offer here and a reasonable valuation. I believe brands like Guinness and Johnnie Walker will still be selling globally for a healthy profit for decades to come.
If I didn’t already have a large holding, I’d snap up Diageo shares today and hold them for the long run.
