The Diageo (LSE: DGE) share price has fallen 5%, excluding dividends, over the past 12 months. However, despite this poor performance, I think the FTSE 100 stock is still worth buying. Today, I’m going to explain why.
Declining FTSE 100 shares
Despite that 12-month 5% dip, Diageo shares have still outperformed the FTSE 100. Since the beginning last February, the stock has outperformed the blue-chip index by 7%, excluding dividends.
What’s more, over the past five years, the alcoholic beverages producer has outperformed the lead index by around 55%.
So why has the Diageo share price performed so poorly over the past 12 months? Well, the pandemic has played a part. According to the group’s results for the half-year ended 31 December 2020, reported net sales fell 4.5% to £6.9bn. Reported operating profit declined 8.3%.
The closure of bars and restaurants worldwide also proved to be a significant headwind for Diageo last year, despite growth in other areas. Sales in North America, for example, increased 12.3%, offsetting declines in other regions.
While these results weren’t perfect, I think they showcase its strengths. Diageo did suffer in the pandemic, but it’s performed substantially better than many other FTSE 100 business. Of course, this doesn’t guarantee the company will continue down this path.
Challenges such as alcohol bans and tax increases in one of the group’s largest markets, India, will hit sales. Higher taxes worldwide may also reduce the global demand for luxury goods, including Diageo’s premium brands.
The outlook for the Diageo share price
Despite the challenges outlined above, I think the outlook for Diageo is bright. The company is investing in new products, particularly in the premium and alcohol-free space. It also owns some of the most valuable alcoholic beverage brands globally. These include brands such as a Guinness, which have a loyal brand following.
These advantages by no means guarantee the company’s long-term success. But I believe they improve its chances. For example, I think it’s highly likely consumers will still be buying and ordering Guinness 10 years from now. It isn’t easy to make the same statement regarding other products supplied by businesses without the same track record as this brand.
As such, despite the recent performance of the Diageo share price, I’ve been buying the stock recently. The group faces some significant headwinds at present, and it will always have challenges to overcome. Nevertheless, I believe its ownership of storied brands such as Guinness is a tremendous competitive advantage, which may increase the odds of the company being a successful investment.
A dividend yield of around 2.3% is also on offer. This distribution is by no means guaranteed, but due to the factors outlined above, I believe the dividend is incredibly attractive.
That’s why I’m willing to overlook the near-term challenges the group faces.
Rupert Hargreaves owns shares in 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.