It’s almost unbelievable, but Diageo (LSE:DGE) shares have gone nowhere in 10 years. From October 2015 to now, the share price is flatter than a pint left out overnight.
Granted, there have been rising dividends along the way. But even these can’t disguise the fact that this FTSE 100 stock has turned into a seriously disappointing investment.
It’s down 55% since the start of 2022!
Yet, the market is famous for overselling stocks, as well as for zealously bidding them up. Let’s take a closer look to see if the pessimism might have gone too far.
Tonnes of uncertainty
To get the lay of the land, I need to know what is worrying investors. And this is problematic because there seem to be several issues, ranging from weak consumer spending and younger people drinking less to the rise of GLP-1 weight loss drugs that supress a desire for alcohol.
On top of this, there are company-specific issues, including no permanent CEO in place and balance sheet concerns. The first is problematic because there’s no convincing turnaround plan (yet). Diageo has committed to cut $625m in costs over three years, but we don’t know whether there will be any major restructuring.
For example, will Diageo adjust its portfolio and bolster its non-alcoholic offerings? Will it spin off the increasingly popular Guinness brand to unlock shareholder value? We just don’t know.
The balance sheet issue relates to the company’s net debt position. This stood at $21.5 bn at the end of June, which is starting to look quite chunky relative to Diageo’s £41bn ($54bn) market cap.
In my eyes, most of these dark clouds look set to continue. Inflation remains high, keeping many consumers under financial pressure. And whether because of this or health reasons (or a bit of both), there’s a rise in more moderate drinking among younger people.
Meanwhile, GLP-1 drugs are still in the early innings of global adoption. With tens of millions more people set to begin taking these treatments over the next decade, it’s possible that overall alcohol volumes will slowly decline, similar to cigarettes.
Valuable assets
The most obvious way to reduce debt would be to sell or spin off assets. When Bloomberg reported in January that Diageo was considering this option for Guinness, the share price jumped more than 6%. But when the company denied this, the stock fell back and has continued sliding lower since.
Diageo also owns a 34% stake in Moët Hennessy. But it said in January that it plans to keep this too. Perhaps a new permanent CEO will revisit this.
Latest broker forecasts
Looking at the valuation, we can see that investors are incredibly pessimistic. The forward price-to-earnings ratio is now less than 14.
Even the average 12-month share price target among analysts is 2,307p. That’s 26.5% above the current price of 1,823p.
Throw in the 4.3% forecast dividend yield, and this suggests a £10,000 investment could become more than £13,000 by the end of 2026.
To be clear, I’m not suggesting an investor should rely solely on broker forecasts (they might prove spectacularly wrong). But there does seem to be a fair bit of value on offer here right now. The selling appears overdone to me.
As such, I think an investor might want to research Diageo further.
