Why I’ve Just Sold Diageo plc

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Although I wisely gave up trying to time stock markets years ago, today’s market turbulence makes now feel like a good time to take profits on stocks I was thinking of selling anyway. And I have been thinking of selling spirits giant Diageo (LSE: DGE) (NYSE: DEO.US) for some time.

First, I would like to raise a glass to the stock. I invested in Diageo almost four years ago, in May 2010, when its share price stood at 1127p. I sold at 1780p. The shares rose 59% in that time, with dividends on top. That is almost double the 29% rise in the FTSE 100 over the same period. They say there’s never a bad time to bank a profit, and I’ll drink to that.

China Dry

I’d have more to shout about if I had sold last year, when I first started harbouring doubts about Diageo. Its share price is down 20% in the last six months. Emerging markets are partly to blame. Initially, I put this down to specific issues, such as the crackdown on gifting to officials in China and political upheavals in Thailand, rather than a wider malaise. But now I’m having second thoughts. The Chinese anti-extravagance crackdown is clearly part of a wider government campaign to whip the froth off the top of the country’s credit bubble, and could knock sales well into the future.

diageoI’ve also been worrying about Diageo’s recent shift in strategy. Former chief executive Paul Welsh’s aggressive acquisition strategy served investors well. His successor Ivan Menezes switched direction with its Drink Better strategy, targeting premium brands. And he has enjoyed some success, with sales of reserve brands of 18.5%, according to its recent half-year results, against a 1% drop in overall net sales. But I still don’t see this strategy presenting the same rapid growth opportunities. 

Time, Gentlemen, Please

During Walsh’s 13 year reign, the company’s market cap rose from £20 billion to £50 billion. Drink Better seems unlikely to deliver such spirited growth. And sometimes I question whether alcohol really is the future, at least in the West. Have you noticed that young people are drinking less (although the middle-aged are still doing their bit)?

Despite my doubts, selling Diageo has left me with a slight hangover. I’m parting while it is relatively cheap, at 17 times earnings. Typically, it has been trading at around 20 times. Management is also working hard to repair its disappointing yield. Right now, you get just 2.7%, well below the FTSE 100 average of 3.67%. But the half-year dividend was recently hiked 9%, with more to come. Nevertheless, I feel the company will struggle to repeat recent spectacular growth, and the next few weeks should throw up some better opportunities.

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Harvey doesn't own shares in any company mentioned in this article