For many years, I was enthusiastic about the investment case for brewer and distiller Diageo (LSE: DGE) – but not the share price. Too many other investors seemed to share my enthusiasm for the company, keeping the price above what I thought was an attractive buying level.
Then, the Diageo share price fell to what I thought was a decent point to buy – so I did.
Since then? It has basically kept falling. Sure it has moved about, but the long-term trend is not good. Over a year, down 15%. Over five years, down 19%.
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As an investor, I see the value of trying to understand why other investors take the opposite view to me.
So far I have seen a lower Diageo share price as a temporary setback. But now I am wondering, might we be facing a lost decade?
Long-term underperformance
That might sound far-fetched, but bear in mind that the share is already significantly below where it was five years ago. In fact, it now stands where it did back in 2017. So it is not far off a lost decade already.
It does have a dividend and indeed that has grown annually for over three decades. The 3.3% yield looks attractive to me, although it is slightly below the average of Diageo’s FTSE 100 peers. And given the inflation we have seen over recent years, in real terms, Diageo has been a dog of late.
Seven or eight years in, can I write this off as a blip? Or am I kidding myself about what is really going on here?
Big challenges and no easy answers
The short-term explanation for Diageo’s woes has been pretty straightforward. People were boozing away during the pandemic lockdowns but things are on more of a normal footing now and economic challenges in Latin America have hurt sales there.
Stepping back, though, I see other warning signs of a potential step change in business expectations. Younger generations are drinking less alcohol than their parents and grandparents did. Beer sales are in long-term decline, while demand for pricy spirits is being buffeted by economic weakness in key markets.
As if that was not bad enough, recent reports of supply challenges for Guinness in England have got me scratching my head. I have not witnessed them first hand and when ordering a pint of the dark stuff at a pub in Inverness last month, the barman said supply was as normal.
But can it really be that Diageo has supply chain challenges in delivering a drink it (or its forebears) have been brewing for over 260 years? That hardly inspires confidence in management.
I’m getting nervous – and curious
Still, I am a long-term investor.
With over 8,700 years left on Guinness’ lease at its St. James’s Gate brewery in Dublin, that is just as well!
Diageo remains solidly profitable. It has expanded into non-alcoholic drinks such as Seedlip to try and meet shifting consumer demands. Its unique premium brands and production sites give it a strong competitive advantage.
On current form, we may indeed be seven or eight years into a lost decade for the Diageo share price. Over time, though, I believe its value will out – so I plan to hold my shares.
