To achieve a 26% return on any individual FTSE stock in a year would be a great outcome. Assuming the share was a fairly decent-sized holding, that gain could help power a market-beating portfolio performance.
Diageo (LSE: DGE) could be one such stock, according to most analysts. Going on their consensus price target of 2,410p, the FTSE 100 spirits giant has the potential to rise around 26% over the next 12 months.
That would be a welcome development for long-suffering shareholders, who’ve seen Diageo lose half its value since the start of 2023.
Bulls and bears
As one would expect, analysts have differing views on Diageo. One big bull out there is Trevor Stirling from Bernstein, who has put a Buy rating and 2,790p target price on it.
If Diageo reached that level — which is far from guaranteed, of course — investors could be looking at a tasty 45% gain. Adding in the 4.1% dividend yield, that would be a cracking result.
Pouring cold water on this though is Sarah Simon from Morgan Stanley. She points to a national decline in alcohol use in the US (Diageo’s most important market). In April, Simon said: “This isn’t just a passing trend – we believe it’s a structural shift that’s set to reshape the beverage industry.”
This difference of opinion stretches to well-known UK fund managers. Terry Smith, for example, dumped his long-held Diageo holding last year due to fears about the rise of weight-loss drugs.
We suspect the entire drinks sector is in the early stages of being impacted negatively by weight-loss drugs.
Terry Smith, Fundsmith Equity.
On the other hand, Nick Train of Finsbury Growth & Income Trust reckons Diageo is very likely to bounce back. As a result, he continues to scoop up more shares.
Valuation
It’s fair to say then that Diageo is becoming a bit of a Marmite stock. The big debate is whether the alcohol industry is in structural decline (similar to cigarettes) or just suffering from a cyclical downturn.
If it’s the latter, then the stock does look great value right now. The forward price-to-earnings ratio is just 15, while there’s that 4.1% dividend yield.
Interlocking trends
However, there are risks that could continue putting pressure on alcohol sales. Firstly, consumers generally have less money due to cost-of-living pressures. This means fewer people out in bars, clubs and restaurants.
More fundamentally, there’s increased moderation by younger generations, many of whom are focused on health and wellness. According to Morgan Stanley, 18-34 year olds today drink 30% less booze than the same age group did 20 years ago. That’s a big cultural shift.
On top of this, there’s an ageing Western population. Average alcohol consumption tends to decline with age, as health concerns, medication use, and a reduced ability to metabolise alcohol all kick in.
Finally, GLP-1 weight-loss drugs, as mentioned above, are reducing alcohol consumption in some individuals.
Foolish takeaway
Having said that, British American Tobacco has returned over 50% in the past year (including dividends). Overall tobacco volumes have been declining for years, so it’s possible Diageo stock could bounce back, even if alcohol volumes fail to grow meaningfully.
Brands like Guinness, Tanqueray and Johnnie Walker are probably timeless. Therefore, Diageo shares may still be worth considering at the current price.
