2 Numbers That Could Make Investors Steer Clear Of Diageo plc

Royston Wild explains why Diageo plc (LON: DGE) could be considered a sticky stock selection.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Today I am looking at why Diageo (LSE: DGE) (NYSE: DEO.US) could be a poor investment for savvy share pickers.Diageo

Here are two numbers that I think help make the case.

1 billion

On the back of surging demand for Scotch whisky from developing markets, back in 2012 beverages giant Diageo announced a huge expansion programme for production north of the border. The company — which produces Johnnie Walker, Talisker and J&B in Scotland — intended to spend around £1bn over the next five years to boost the flow of the drink from the country.

However, Diageo announced this week that

the weaker global economic environment has impacted the growth of Scotch in certain markets and therefore Diageo will continue to review and adjust the timing of the next phase of our investment programme to manage our Scotch whisky inventory and to retain the alignment between growth in production volumes and growth in demand.”

As a result Diageo has now put plans for a brand new £50m malt whisky distillery at Teaninich in the Scottish Highlands, as well as a string of other extensions and improvements to existing facilities.

The business has been hit hard by a number of troubles in critical overseas territories, from the impact of anti-extravagance measures in China through to weakening currencies in key markets — indeed, the Russian rouble slid to its lowest on record this week owing to the enduring political crisis in Ukraine.

I remain convinced that a backcloth of rising population growth and increasing personal affluence levels — and with it demand for luxury goods including Diageo’s premium labels — bodes well for long-term growth. But the company’s ditched expansion plans this week highlight the macroeconomic turbulence which threaten sales performance in the meantime.

0.1

Diageo announced in this month’s interims that organic net sales slumped 1.5% during July-September, with volumes across the globe falling by an alarming 3.5% during the period. The headline-grabbing number during the period was a colossal 7.4% collapse in sales in Asia Pacific, although I believe that stagnation in its critical North American market should be equally alarming.

Although Diageo noted that

our reserve brands and our innovations continue to perform well, consumer demand for mainstream brands is still constrained by weak consumer confidence in average income households.”

Sales in North America edged just 0.1% higher in the last quarter, slowing from expansion of 3% in the year concluding June 2014. With Diageo sourcing more than half of group profits from this one market alone, signs of continued slowdown here should come as a major worry.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild 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.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »