Are we at maximum pessimism for Diageo (LSE: DGE) shares? As investors rush out of the stock on the back of worries about lowering demand for alcoholic drinks, some of us are wondering whether they’ve entered bargain territory.
The latest analyst forecasts suggest so, at least.
Verdicts
The general verdict among the 23 analysts covering the stock is very good albeit with a few reservations thrown in there.
There are 14 giving the stock the thumbs up with either a Buy or Outperform while only three are saying Sell. Interestingly, the gloomier predictions are retreating – five were labelling the stock a Sell at the start of the year.
The consensus across all the analysts (as an average) is for an 18% increase in share price over the next 12 months. The most optimistic analyst is predicting a whopping 59% increase by January 2027. We should be looking at some above average dividends for the FTSE 100 stock over the next year too.
A £1,000 stake invested today could turn into £1,229 in a year’s time – assuming the average forecast is true and dividends are as expected. That number shoots up to an impressive £1,642 at the high end of the scale.
Before getting into what I think of the stock, I will mention that dividends are not guaranteed and forecasts are often wide of the mark. The above numbers are more to show what might be possible rather than being anything we can bank on.
Turnaround?
Full disclosure: Diageo has cost me quite a bit of cashola of late. While many of the other FTSE 100 stocks in my portfolio are going gangbusters, the drinks maker has had a forgettable few years.
I was attracted by a well-run business with strong fundamentals. The eye-catching alcohol brands like Tanqueray and Smirnoff are staples. The repertoire even included arguably the most popular drink of the 2020s — Guinness.
Such strong brands give the company a competitive advantage, or what is called an economic moat by Warren Buffett. The firm leaned into this idea with its concept of ‘premiumisation’. This means focusing on a few high-quality drinks and names to propel the company forward. Quality over quantity, in other words.
There was one thing I hadn’t counted on however: that folks would start drinking less. Partly this is down to a cost-of-living crisis making it more expensive, and partly down to shifting trends like people trying to be healthier. There is also growing evidence that popular weight-loss drugs like Ozempic reduce appetites for drinking as well.
While worries about lowering alcohol consumption, especially among Gen Z , have scared off investors, I’m optimistic there will be a turnaround sooner or later. Will that happen by next January? I don’t know, but I’m not selling.
