I’ve bought more Diageo shares for my retirement portfolio. Am I mad?

Diageo shares have fallen more than 50% from their highs. And at current levels, Edward Sheldon sees scope for attractive returns.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Older Man Reading From Tablet

I’ve been talking about buying more Diageo (LSE: DGE) shares for a while now and I’ve finally gone and done it. Recently, I added to my holding while the share price was under £16.

Am I mad to invest in this dog of a stock when there are so many other great opportunities in the market? Possibly!

But here’s my rationale for investing more money in the alcoholic beverages powerhouse.

The shares look dirt cheap

Let’s start with the fact that the shares have fallen more than 50% from their highs. That’s a huge decline for a large-cap FTSE 100 company. And I see it as excessive. After this decline, the shares now look cheap. Currently, the forward-looking price-to-earnings (P/E) ratio here is only 13.

That strikes me as an attractive valuation for a company with a whole portfolio of world-class brands. I know this company’s facing some challenges but I’m unconvinced it deserves to trade at a below-market-average earnings multiple.

It’s worth noting that earlier this month, Diageo’s chief commercial officer Dayalan Nayager bought about £460,000 worth of shares. So he obviously sees value too.

As for the dividend yield, it’s jumped to almost 5%, so I could pick up some decent income here. I’m not banking on this income however, as I think there’s a chance the dividend payout may be reduced to free up cash.

The new CEO’s a turnaround specialist

Another reason I’ve invested more money in the company is that it has a new CEO, Dave Lewis (aka ‘Drastic Dave’). A turnaround specialist (he fixed Tesco’s problems), he’s been brought in to radically improve performance.

I think there’s a lot he can do. If I was the CEO of this company, I’d consider:

  • Offloading weak/underperforming brands to free up cash and bolster the debt-heavy balance sheet.
  • Being far more selective with brand acquisitions (it has bought some duds in recent years).
  • Reducing the dividend to free up more cash.
  • Pivoting towards more accessible premium products to capture/retain cash-strapped consumers.
  • Focusing more on low/non-alcohol spirits to appeal to a wider range of consumers (eg non drinkers and those who are more health conscious).
  • Aggressively using AI to streamline marketing activities and reduce costs.

Overall, there’s a ton he can do to improve performance here. I’m hoping we start to see some action in the months ahead.

A turnaround could take time

Of course, Lewis has his work cut out. Right now, Diageo’s facing a toxic combination of less disposable income, US tariffs, changing attitudes towards alcohol, lots of debt on the balance sheet, and negative investor sentiment.

Given all these issues, I’m not expecting the stock to shoot up in the near term. A recovery could be slow.

I’m a patient, long-term investor however. And I see scope for attractive returns in the years ahead given today’s low valuation.

In my view, the shares are worth a look while they’re near £16.

Edward Sheldon has positions in Diageo. The Motley Fool UK has recommended Diageo Plc and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

British coins and bank notes scattered on a surface
Investing Articles

£100 invested in a Stocks and Shares ISA today could be worth…

A Stocks and Shares ISA is a proven way of building wealth. But how much could a smaller stake of…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

April opportunities: 2 heavily-discounted stocks to consider buying

Are under-the-radar growth stocks the best place to look for potential stocks to buy as investors look for certainty in…

Read more »

Workers at Whiting refinery, US
Investing Articles

Why the BP share price *finally* surged 24.5% in March

Long-term owners of BP stock have had a frustrating few years, but is the share price rising 24.5% in March…

Read more »

Night Takeoff Of The American Space Shuttle
Investing For Beginners

Why April could be the start of a stock market recovery

Jon Smith lays out the blueprint of different catalysts that could lead to April being a solid month for a…

Read more »

Typical street lined with terraced houses and parked cars
Investing Articles

This FTSE 100 stock has fallen 50% and directors are loading up on shares

This FTSE 100 name has crashed spectacularly and company directors are snapping up shares. Clearly, these insiders expect it to…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

I like Rolls-Royce shares but not the price tag. Here are 2 cheaper alternatives

Rolls-Royce is an incredible company but its shares are richly valued. So are there alternative stocks offering exposure to its…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Should I buy Lloyds shares before the ISA deadline?

Dr James Fox takes a closer look at Lloyds' shares with the Stocks and Shares ISA deadline fast approaching. The…

Read more »

Middle aged businesswoman using laptop while working from home
Investing Articles

£10,000 invested in Nvidia stock 1 year ago is now worth…

Nvidia stock isn't just important for its shareholders. It's the bellwether for the technology sector and AI. Dr James Fox…

Read more »