FTSE 100 beverages giant Diageo’s (LSE: DGE) share price has performed superbly during this year, rising steadily since February and reaching an all-time high during the past week. The obvious question that makes me curious as an investor is – can I still invest in the share and be assured of steady, long-term gains or is it better to wait for a correction and then invest?
Let’s find out.
Change is in the air
To assess its long-term prospects, it’s essential to consider structural changes on the horizon. And as I have been saying in my recent articles, disruption is fast becoming the name of the game. A shift towards a cleaner, healthier world is driving innovations across industries like petroleum and tobacco. Alcohol isn’t far behind, with a growing market for non-alcoholic drinks and the rise of weed-based products, as cannabis regulations are relaxed.
According to the UK’s Office for National Statistics, only 57% of adults over 16 consumed alcohol in the week before it conducted its 2017 lifestyle survey, down from 64% in 2005. The percentage of those embracing teetotalism has also increased. Diageo’s own Drinks Report 2019 acknowledges the need for more innovation in the ‘free-from’ market. But it has been thinking this way for some time and it invested in the non-alcoholic drinks company Seedlip back in 2016.
In the US, its biggest market, cannabis is becoming alcohol’s competitor, and seeing fast market expansion. While past reports have suggested that Diageo is mulling a market entry, no commitment is visible yet. According to my assessment of the reports, the producer of popular alcohol brands like Guinness, Gordon’s and Pimm’s will most likely throw its hat in the ring sooner rather than later.
Immediate prospects are healthy
It’s worth noting, however, that the ‘alternative’ drinks markets is still quite young compared to the alcohol market, the firm’s main revenue generator. But taking or mulling steps now is a move in the right direction that should hold Diageo in good stead when that alternative segment does become larger. In the interim, it is very comforting for the investor that the company is showing strong and steady performance.
In talking about the company’s recent performance, CEO Ivan Menezes said: “We are on track to deliver our medium-term guidance of 175bps of organic operating margin expansion for the three years ending 30 June 2019 and our expectation of mid-single-digit net sales growth over this period is unchanged.” And the latest results released at the end of January backed up this view, with increases in both net sales and operating profits, leading to the sharp rise in the share price since then.
The company is also rolling out progressive policies like the newly-announced, generous, fully-paid 26 week maternity and paternity leave. Of course this isn’t a justification to invest, but I feel better putting money into shares of a company that is trying to be a better employer.
The question remains, however, is now a good time to invest? Yes, but I would put in just £1,000 now and wait for dips to invest more, especially since its 12-month trailing price-to-earnings ratio at 28x suggests it isn’t pricey compared to its global peers like Heineken.
Manika Premsingh has no position in any of the shares mentioned. 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.