The Motley Fool

What’s happening to the Diageo share price?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Shelves holding drinks bottles
Image source: Getty Images.

Diageo (LSE: DGE) has been one of the best performing investments in the FTSE 100 this year as the Diageo share price has risen strongly. Year-to-date, the stock has produced a total return of nearly 19%. Moreover, in the past 12 months, it has returned 22%, including dividends. 

Shares in the drinks giant fell around a third in the first quarter of 2020, as the coronavirus pandemic spread around the world.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

However, since then, the stock has experienced a steady recovery as the fallout has not been as bad as initially expected.

In fact, sales and profits have recovered so quickly that Diageo said it would resume plans to return £4.5bn to shareholders earlier in the month. It suspended this plan in April last year after returning just £1.3bn through buybacks. 

Diageo share price outlook

It seems the market is hoping Diageo’s recovery will continue. I think the chances are it will.

While it’s still early days, initial sales figures from the hospitality industry in the UK show that consumers have been happy to splash the cash as they’ve returned to bars and restaurants. And this trend is echoed around the world. 

Diageo’s North American sales grew 12% in the first quarter. The reopening of the US economy powered growth. 

But the Diageo share price is far more than a reopening investment. The owner of alcoholic beverage brands such as Guinness and Johnnie Walker is also a play on emerging markets growth.

It owns 50% of India’s largest spirits business and has a foothold in the Chinese market. The growing middle class in these regions could lead to increased demand for Diageo’s higher-value brands. 

I believe this potential is the main reason why the stock has performed so well over the past few months. As the global economy starts to move on from the pandemic, Diageo’s global footprint and premium brands may register strong growth.

Risks and challenges

Despite the above strengths and opportunities, Diageo does have its risks. For one, borrowing is a little on the high side.

Net debt was equivalent to 3.4 times cash profits at the end of December 2020. This level of borrowing appears sustainable, but it could be a considerable risk for the enterprise if interest rates rise significantly. The company may have to reduce shareholder returns to free up capital to pay down debt.

At the same time, higher commodity costs could hurt profit margins. This may once again lead to lower shareholder returns. 

Still, despite these risks, I’m pretty content to own Diageo and would buy more of the stock for my portfolio today

I think the company’s portfolio of billion-dollar brands gives it a substantial competitive advantage. Further, its position in emerging markets should enable the group to profit from these regions’ economic growth.

Overall, I reckon the trends that have pushed the Diageo share price higher over the past year may continue. 

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.