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4 reasons why I think the Diageo share price could rise

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Shelves holding drinks bottles
Image source: Getty Images.

There’s some momentum behind the Diageo (LSE: DGE) share price. As I write, the stock is up over 8% in the past month and more than 18% in the last year. Of course, there is no guarantee this will continue. But I think the stock could rise further. And here are four reasons why I’d buy.

#1 – Diversified portfolio

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One of the reasons why I like the company is because of its diversified beverage portfolio. It has over 200 brands including Johnnie Walker, Smirnoff and Guinness. This means that the firm has spread its risk and should cater for all consumer tastes.

I think what has been driving the Diageo share price recently is the easing of lockdown restrictions. As more people socialise they are likely to eat and drink out. This means that drinks will be consumed and Diageo is well positioned to capitalise on this.

#2 – Emerging markets

A large proportion of revenue is derived from emerging markets, which I think is a key growth driver. In fact, approximately 19% of its 2020 full-year sales came from the Asia Pacific region and 12% from Africa.

There is a growing middle class in these emerging economies. Especially in countries such as China and India. Drinking some of Diageo’s beverages such as its whisky is seen as a sign of social status.

This is working in the company’s favour and consumers are willing to pay more for its premium brands. I reckon this is likely to continue and should boost the Diageo share price in the long term.

#3 – Acquisitions

Part of the beverage company’s investment strategy is to acquire brands to expand its overall portfolio. Earlier this month, it purchased Loyal 9 Cocktails, a rapidly growing spirits-based ready-to-drink firm. And in March, it acquired Far West Spirits LLC, owner of the Lone River Ranch Water brand. 

So what does this mean for Diageo? Well, it further diversifies its global portfolio and puts the company in a very competitive position. To me, its pleasing to see that it’s using the pandemic as an opportunity to consolidate within its sector.

#4 – Dividend

While capital appreciation in Diageo’s share price is important for me, I also like income. The stock generates a dividend yield of over 2%, which so far has been covered by its earnings.

Of course, there’s no guarantee that these income payments will continue. But what gives me some comfort is that Diageo has a long-term track record of paying its dividend.

Risks

The downside is that the stock is expensive and has a price-to-earnings ratio of 30x. The Diageo share price is also likely to be sensitive to any Covid-19 setbacks.

Any delays in the vaccine rollout or the easing of lockdown restrictions will mean that people are less likely to socialise and have a drink. Hence the company’s revenue and profitability could be hit.

But I reckon that sometimes it’s worth paying for a quality stock like Diageo and so I’d buy it.

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Nadia Yaqub 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.

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