I’ve been tempted to tuck into Diageo (LSE: DGE) shares for a long time. But based on their performance over the last four years, I’m very grateful for not pushing the Buy button.
Once mighty…
Back in late-October 2021, shares in the owner of brands such as Guinness, Johnnie Walker whisky and Smirnoff vodka were riding high. And with good reason.
Having been sent indoors during multiple Covid-related lockdowns, it was only natural that people would want to get out there and enjoy themselves in pubs, bars and restaurants. But even consumption at home was still going strong.
There also seemed to be a shift in the way that people were consuming alcohol. ‘Premiumisation’ — where consumers spend more on higher-end spirits — was all the rage. Again, this was great news for the FTSE 100 juggernaut.
As a result of all this, Diageo reported strong sales growth and better operating margins.
Since those heady days, however, things have gone very wrong. We’re talking about a halving of the share price.
Sobering slump
Diageo’s fall from grace isn’t hard to fathom. With prices rising everywhere, it was only a matter of time before trade began to suffer. This has led to weaker performance in key markets, pushing the company to remove its guidance on sales over the medium term.
But consumer cost-cutting hasn’t been the only reason. Younger generations seem to be particularly health-conscious. Users of weight loss drugs have also noted a significant reduction in their desire to drink.
Throw in the potential impact of US tariffs, not to mention the confidence-sapping ‘stepping down’ of former CEO Diana Crew, and you have a rather nasty cocktail of problems.
Is NOW the right time to consider buying?
So yes, I’m glad to have not taken the leap four years — or even one year — ago. But is there any argument for saying that the stock is now oversold?
Well, I’ve never seen the valuation this low. We’re talking about a stock changing hands for 14 times forecast earnings. That’s still on par with the average in the FTSE 100. And you could say that the average top-tier stock doesn’t have Diageo’s issues.
However, that valuation is significantly lower than the company’s average price-to-earnings (P/E) ratio over the last five years (22).
Analysts also have the shares yielding 4.3% with the dividend set to be comfortably covered by expected profit (although this might not always be the case).
But my chief reason for being optimistic actually has little to do with the drinks giant. Perhaps a bursting of the AI bubble (if, indeed, it is a bubble) may bring investors back to less glitzy, more defensive stocks. Let’s not forget this is a truly global operator. So, those buying wouldn’t be dependent on one geographic region or country.
Here’s what I’m doing
Given the very unlikely scenario that we’re all going to turn teetotal overnight, I wonder if the shares are now a less risky proposition than they once were.
Even so, I’m still happy to sit on the sidelines and wait for signs that the tide could be turning for Diageo before putting a big sum like £5,000 to work. Whether that comes from rising sales or some other tailwind is, of course, hard to say.
It stays on my watchlist.
