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Should I sell my Diageo shares today?

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There is no doubt that the Covid-19 pandemic has winners and losers as far as investments are concerned.

In the UK stock market in particular, certain sectors and companies have seen their performance improve. However, for the most part, stocks are still trading lower than they were 12 months ago, just as the pandemic was beginning to take hold in the UK.

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Indeed, 59 of the current FTSE 100 constituents have seen their share prices decrease during that period. The index itself is down around 12%.

One of the companies that has slipped during that time is beer and spirit producer Diageo (LSE:DGE), which is down more than 7% in the last year.

With part of Diageo’s business significantly curtailed by ongoing restrictions on bars and restaurants, should I sell my shares in the company?

Stout defence

The makers of Guinness beer and Johnnie Walker whiskey have had to pivot the business quite substantially since the onset of Covid-19. This has understandably led to a greater focus and investment on off-trade.

In the most recent earnings report, Diageo reported an 8.3% fall in operating profit, with sales declining 4.5% due to “unfavourable exchange rates“.

Despite that, underlying sales grew by 1% with strong performance for spirits such as gin, whiskey, and tequila. Beer sales were down 11% as venue sales understandably took a hit.

Income investors were pleasantly surprised as Diageo hiked its interim dividend to 27.96p. Based on its current share price of 2980p, that’s a yield of 2.3%. 

While that isn’t the biggest you will find in the Footsie at the moment, I’m encouraged that management is confident enough to raise the dividend given the current choppy trading climate.

Is it a good time to sell Diageo?

I bought shares in Diageo a number of years ago due to its strong brand portfolio and growth potential in emerging markets. Neither of those factors has changed, and, while demand for their on-trade products is currently suffering, I’m confident that will return within the next year at least.

China and India have both been earmarked by Diageo as markets with significant growth potential, which will continue to be the case in the long term.

The most worrying aspect for the company for me is the impact the pandemic will have on the travel retail branch of the business. This will undoubtedly take longer to return to normal than the other areas.

I fully expect management to be more aggressive with their dividend increases when the company returns to more normal trading environments — not too many are confident enough for a hike at the moment and Diageo is one of the few.

Many may see Diageo as expensive as it has a price-to-earnings ratio (P/E) of 27, but I’d be happy to pay that for a company that has built brands successfully for decades. That’s why I’ll be holding my Diageo shares and not selling them for a number of years.

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conorcoyle owns shares of Diageo. 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.

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