Drinkers do not like being served a short measure. And as an investor, I do not like buying a share only to discover that it is much less pleasing than I expected. Is that the case with Diageo (LSE: DGE)? Over the past five years, the Diageo share price has fallen 29%. That is bad enough but it is particularly unimpressive given that the wider FTSE 100 index (of which Diageo is a member) has grown 75% during that period.
Sure, that share price fall means that the Diageo dividend yield has now hit 4.3%. This is a company that has raised its payout per share for decades, so has a strong story for income-focused investors.
But dividends are never guaranteed to last at any company. That share price decline is horrendous. Can anything save Diageo?
Let’s consider a few possible scenarios.
Scenario one: strengthening economy, competent management
As the Diageo share price tumbled, the brewer and distiller abruptly replaced its chief executive this summer.
Previous management had not impressed me (or the City, it seems), but it remains to be seen how good current management will turn out to be.
Presuming they are competent at least, and also that the economy picks up in key markets, I reckon Diageo could turn around some of the sales challenges it has faced in recent years.
Maintaining its record of dividend growth (something I see as essential to support the share price, given what it signals about the company’s health) and improving profitability could both help boost the Diageo share price.
But without evidence that declining alcohol consumption rates among younger consumers are a temporary rather than permanent phenomenon, I think the investment case for booze makers is weaker than five or 10 years ago. That could act as a long-term brake on Diageo’s share price.
Scenario two: total market set for growth
Are younger consumers really not going to learn to like a Guinness or Baileys at some point?
Only time will tell. Beer sales have been in decline for years and spirits sales are also facing weaker demand.
But it is unclear whether that is a permanent shift, or a trend that will weaken in years to come. On top of that, population growth could mean that total demand remains the same (or even grows) despite the percentage of people who are teetotal growing.
If it becomes clearer that long-term demand is resilient, I think that could help turn the Diageo share price around.
Scenario three: milking the cash cows
What if long-term demand is not resilient? Diageo has expanded its non-alcoholic offerings, but that is already a crowded market where its competitive advantage is weaker than for booze.
Alcohol could end up looking like tobacco: decline demands, but the process takes decades and along the way companies can raise prices to keep generating sizeable profits.
Diageo’s strong brands and unique production facilities could help it to do that. That approach might also keep the dividend growth coming, as it has at British American Tobacco.
That alone might stop the Diageo share price falling further, though the lack of a compelling growth story could also hurt its ability to rise substantially.
