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Will the Diageo share price keep climbing?

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The Diageo (LSE: DGE) share price has been up and down since the pandemic started last year. Peaking at 3,500p at the end of 2019, prices dropped as low as 2,400p in March 2020. Share prices are up 500p year-to-date, hovering around the 3,000p mark. Although prices have been shaky throughout the last 12 months, I still believe this stock is poised to climb higher in the future.

The background

Diageo is the owner of over 200 brands of alcoholic beverages. Some of the most recognisable names include Guinness, Cîroc, Smirnoff and Baileys. But persistent lockdowns have led to the mass closure of the hospitality industry, affecting the FTSE 100 firm. However, Diageo finished the last six months of 2020 with organic sales up 1%. This has largely been due to the increases in household alcohol consumption, with spirit sales up 15% in the UK alone.

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What’s more, the recent announcement of the UK-US whisky tariff suspension has helped drive the Diageo share price up over 5% since the beginning of March. The four-month suspension is in place until a long-term settlement is reached.

Although this is good news, reported net sales were still down 4.5% to £6.9bn for the second half of 2020. This was reflected in operating profits, which fell 8.3% to £2.2bn. However, the company did display good cash generation, with free cash flow up from £800m to £1.8bn. This highlights what Chief Executive Ivan Menezes believes to have been a “strong performance in a challenging operating environment”.

Current Diageo share price

Competitors Heineken and Carlsberg also reported decreases in organic revenues of 11.9% and 8.4% respectively. However, Diageo is currently still sitting at a much higher price-to-sales ratio of 6.15 compared to Heineken’s 2.56 and Carlsberg’s 2.44. This begs the question, is the current Diageo share price overvalued?

While 2020 definitely hurt the Diageo share price, I still believe that it’s a good stock to buy now. People should still be consuming household beverage brands like Guinness and Smirnoff decades from now. This gives the stock longevity, an attractive quality for investment. The constant acquisition of up-and-coming brands is also attractive to me. For example, George Clooney’s Casamigos tequila operation was bought for £700m in 2017 and saw a 139% increase in sales during the last sixth months of 2020.  

The 2.3% dividend yield is also attractive, largely reflecting the slow but steady growth rate of the company. In addition to this, the global easing of pandemic restrictions is only going to boost business. The hospitality business is likely to boom in the next few years and the Diageo share price will benefit from this. However, the alcoholic beverage industry still remains highly regulated. For example, consumption is prohibited in some Indian states, a key market for Diageo. This could also affect long-term growth.

But overall, despite the recent struggle, I think the Diageo share price can keep climbing as we move closer to a post-pandemic world.

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Dylan Hood has no position in any 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.

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