Do you ever take your eye off some of your favourite shares? I confess I’ve neglected Diageo (LSE: DGE) for a while. But I was drawn to it again by the drinks giant’s Wednesday trading update, and by seeing a jump in the Diageo share price.
By mid-afternoon, the shares were up around 3.5%. And so far in 2021, we’re looking at a 15% rise — compared to 7.5% for the FTSE 100. The global pandemic crisis did take its toll. After all, pubs, bars, and restaurants being closed around the world doesn’t exactly help the booze business.
But Diageo is bouncing back, and the events of 2020 are already looking like just a blip in a long-term upwards trend. Over the past five years, for example, the Diageo share price has risen by 75%. Anyway, what’s the latest news all about? There are two key points from it for me. One is that profits are growing, and the other is that a stack of cash should be making its way back to shareholders.
To be more specific, the company reckons organic operating profit will grow 14% in the current year, slightly ahead of organic sales. Diageo told us that “with a return to organic net sales growth, our business has continued to deliver a good recovery across all regions“.
Return of capital is back on
That’s helped get Diageo’s return of capital (ROC) programme back on track. Approved in 2019, the plan was to return up to £4.5bn to shareholders over a three-year period. It would be by whatever combination of buybacks or dividends made sense as market conditions varied. In the first phase, Diageo bought back shares to the value of £1.25bn. But no sooner had that phase ended, and before we got to see how it might benefit the Diageo share price, then Covid-19 arrived.
The next ROC phase was put on hold, but now the company is set for its resumption. Diageo says it is “initiating the second phase of its ROC programme of up to £1.0 billion to be completed by the end of fiscal 22“. It will start with the buyback of up to £0.5bn in shares between now and November.
Diageo share price threats
This all sounds good, but what are the risks? What might send the Diageo share price back down again? I hate to tempt fate, but I wonder if this might all be a bit premature. The opening up of the hospitality business across the globe hasn’t really got underway yet. And it’s only a month or two ago that medical experts were predicting a third wave of coronavirus here in the UK, despite our vaccination progress.
Then there’s the risk of new strains of Covid-19 that can evade vaccine-provided immunity. And in the longer term, I wonder if booze outlets will have to change the way they operate. Sardine-like packed crowds in pubs are massive spreaders of all sorts of bugs. And the next pandemic could be just around the corner.
But let me counter that negativity. I have faith that we, the great British public, will soon get our blood alcohol levels back up to normal. And we’ll find a way to keep them there. I reckon the Diageo share price is a bargain now for my portfolio.
Alan Oscroft 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.