Is this the right time to buy into the Diageo share price?

Does Diageo plc (LON: DGE) represent a buying opportunity right now?

| 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.

Diageo (LSE: DGE) shares have had a difficult second half in 2018, and it might still be premature to invest in DGE fully.  Although the share price is up nearly 5% over the past 12 months, year-to-date its shares are down about 1.3%.

So what should we expect from Diageo, the global spirits maker and brewer? Here are the pros and cons to DGE shares.

Pros for Diageo shares

With its diverse global exposure and brand portfolio, Diageo shares offer long-term growth potential.  Such geographic diversification – especially into emerging economies, where consumers are increasingly showing brand loyalty – provides a relatively defensive investment opportunity.

The strong brand names of Diageo contribute to increased volume growth in most markets and gives DGE pricing and competitive power within this non-cyclical market. DGE has over 200 strong brands, including Baileys, Captain Morgan, Don Julio, Guinness, Johnnie Walker, and Smirnoff

Diageo management is also likely to consider partnership opportunities with Canadian cannabis firms, with an aim to offer marijuana-infused drinks. DGE’s competitors, Molson Coors Brewing and Constellation Brands, have recently announced acquiring stakes in Canadian cannabis companies.  Although it is too early to say how a bet on “drinkable cannabis products” would pay off, Diego has a history of innovation in the sector.  For example, in the UK Diageo has successfully turned new launches or brand extensions, such as Gordon’s Pink, Haig Clubman, and Smirnoff Cider, into category-toppers.

Cons for Diageo shares

In June 2018 Diageo announced a subdued earnings update with profits predicted to increase only by 1.4% over the coming year.  Management also cited the uncertain environment regarding global foreign exchange (FX) fluctuations.  DGE’s revenues from India and China have suffered considerably as their currencies have depreciated.  Analysts are also concerned about any future development that could hamper personal consumption growth in DGE’s major markets, such as the US and Europe.

In most countries, alcohol is heavily taxed and facing an increasing public health scrutiny and warning.  For example, in its efforts to reduce problem drinking, England – like Scotland – is considering the introduction of minimum unit pricing (MUP).  Amidst the debate on whether the MUP policy would be useful in changing the behaviour of problem consumers, the drinks industry and analysts are concerned over its effect on sales and margins.  In 2017 India introduced a “highway liquor ban,” restricting the sales of alcohol near motorways. The initial result has been a shrinking drinks market for DGE.  Although the ban has recently been relaxed, it was a stark reminder of how government policy can easily affect alcohol sales.

The bottom line on Diageo shares

Despite concerns about increased public health warnings against and higher taxes on alcohol, Diageo management is committed to growing revenues, and the company’s fundamental story remains intact.  If you also still believe in the bull case for DGE shares then you might, however, consider waiting for a better time to buy, such as a share price of closer to 2,000p.  Diego’s 52-week price range has been 2,345-2,885p, and I believe the share price is likely to test this low again in the coming weeks.

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.

The Motley Fool UK has recommended Diageo. 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

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

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 »