Diageo (LSE:DGE) shares have been one of the worst investments in my Stocks and Shares ISA. When I opened a position in late 2018, the company was trading around £26.81 per share. Today, it changes hands at £15.11, a 44% discount.
It wasn’t all bad though. I topped up my holdings in summer 2023 when Diageo’s share price was higher than when I first bought in, at £33.57. Given its subsequent stratospheric price slide, I wish I’d sold the FTSE 100 share instead of buying more!
Insult has added to injury with Diageo’s decision to cut dividends earlier this year. All things considered, it’s one of the worst stocks I’ve ever bought for my ISA.
Yet I’ve just had a brainwave, and it’s involved buying more Diageo shares for my portfolio. Have I gone bonkers? Not at all. At least I hope not. Over time, I think it could prove a masterstroke…
A 36% discount
Like investing guru Warren Buffett, value investing is a core part of my stock-buying strategy. As the self-made billionaire once said: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.“
When an opportunity to bag a quality company at rock-bottom prices comes up, I strike. The rationale is that well-run companies with proven business models recover from setbacks, and that their share prices can rebound strongly over time.
Diageo’s shares are certainly marked down at current prices, and then some. Its forward price-to-earnings (P/E) ratio is 13.1 times. That’s 36% below the 10-year average of 20.5.
Yet investors today need to ask themselves this question: is Diageo’s lower valuation a fairer reflection of its investment outlook today?
Rising risks?
It’s certainly true the risks facing the FTSE firm have grown significantly of late. Pressure on consumer wallets has endured, and today Diageo’s higher-priced beverages don’t have the pull they once did. Drinkers have been switching to cheaper alternatives.
The biggest challenge Diageo faces though, is a broader decline in alcohol consumption in key markets. People in North America and Europe are drinking less — or cutting out booze entirely — in pursuit of healthier lifestyles. The widescale use of weight-loss jabs that suppress alcohol cravings are compounding this trend.
Could Diageo shares prove an inspired buy?
Yet I believe Diageo has what it takes to recover. The vast majority of people will still drink, and especially in emerging markets where long-term drinks consumption grows. Supported by its huge portfolio of billion-dollar brands, I expect the firm’s sales to ignite when consumer spending power recovers.
On top of this, Diageo’s refining its product ranges to better suit changing consumer demand. It’s slimming down the number of premium lines to concentrate on more mainstream products. And the company has invested in non-alcohol variants to enormous success (its Guinness 0.0 line is selling at double-digit rates).
The good news is overall sales actually grew in the March quarter when a fall had been expected. Revenues were up by a modest 0.3%, feeding speculation that Diageo has now bounced off the bottom. Fresh evidence of this in August’s full-year trading update could prompt a share price spike.
Diageo shares are clearly not without risk. But as market conditions improve, and new CEO Dave Lewis continues his turnaround plan, I’m optimistic the drinks giant can rebound.
Should you invest £5,000 in Diageo Plc right now?
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Royston Wild owns shares in Diageo.
