Is Now The Right Time To Buy Diageo plc?

DiageoDiageo (LSE: DGE) (NYSE: DEO.US) shares have fallen by 12% so far this year, as the firm’s growth has tailed off, while profits have been hit by currency weakness in emerging markets.

The drinks firm’s share price hasn’t been this low since 2012 — so is now the time to buy, or is there worse to come?

I’ve taken a closer look at Diageo’s performance and valuation to find out more.


Let’s start with the basics: how is Diageo valued against its past performance, and the market’s expectations of future performance?

P/E ratio Current value
P/E using 5-year average adjusted earnings per share 19.3
2-year average forecast P/E 16.6

Source: Company reports, consensus forecasts

Diageo is not cheap, but the firm’s above-average profit margins, rapid acquisition-led growth and high returns on capital have always been seen as justifying its premium valuation.

However, sales and profits fell last year, thanks to currency headwinds and slowing economic growth in key markets such as China. Is there an underlying problem?

A closer look

I’ve taken a closer look at Diageo’s growth record to try and gauge whether the firm’s medium-term growth prospects remain strong:

5-year compound average growth rate Diageo
Sales 1.0%
Operating profit 1.0%
Dividend 6.3%
Book value 11%
Net debt 3.1%

Source: Company reports

These figures present a mixed picture. On the one hand, last year’s fall in sales and profits wiped out most of the gains seen between 2010 and 2013.

However, this could be a short-term dip — Diageo’s underlying value creation is more clearly illustrated by the fact that book value has risen by an average of 11% per year over the last five years, while net debt has only risen by an average of 3.1% each year.

This suggests to me that Diageo’s acquisitions are paying their way and helping to fund new growth, rather than just bloating up the business.

On this basis, Diageo looks increasingly good value. Over the medium term, sales and profits should recover and deliver fresh growth, while, in the meantime, the firm’s rising dividend will reward patient shareholders.

Has Diageo bottomed out?

If you’re a Diageo shareholder looking to top up, you’ll probably be hoping to wait until the company’s share price has bottomed out, before buying.

I’m planning to add some of the drinks firm’s shares to my portfolio later this year, and although I’m hoping that the firm’s share price will continue to fall, I’m not really sure if that’s likely.

My decision to buy is based on Diageo’s prospective yield, which has now risen to 3.2%. In my view, that makes these shares cheap enough to buy — although you may not agree.

However, my positive view on Diageo is shared by the Motley Fool's expert analysts, who recently selected the firm for their exclusive wealth report, "The Motley Fool's Three Shares To Beat Property".

This brand-new report highlights three stocks with emerging market exposure that could outperform the UK market over the medium term.

In addition to Diageo, the report also profiles a financial firm with a forecast P/E of 11 and a 4.3% yield, which I also rate as a strong buy.

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Roland Head has no position in any shares mentioned. The Motley Fool has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.