Diageo (LSE:DGE) shares have cost me an arm and a leg. Trading at £15.35, the FTSE 100 company’s stock is 43% cheaper than when I first invested eight years ago.
But I haven’t lost the faith. In fact, I recently increased my stake in the Guinness producer. In my latest investing strategy, I could go a long way to reducing my losses.
You might think I’m taking an outrageous risk given how my portfolio’s already been hammered. But here’s the thing: City analysts also think Diageo’s share price is about to hit back…
A 27% rebound?
Right now, 23 brokers have ratings on Diageo shares. And they’ve predicted the drinks giant will hit £19.66 per share over the next year. If accurate, that would turn a £9,999 investment in a Stocks and Shares ISA into £12,699 by next July, all tax free. That’s a brilliant 27% annual return.
No share price target’s set in stone. But one that’s based on the average forecast of 20+ experts carries a lot more heft. It reflects broad and balanced viewpoints of what could drive Diageo higher, as well as what might pull it lower.
So what could influence Diageo’s shares over the next 12 months and beyond?
The case for… and the case against
Key factors that could move Diageo’s share price include:
The bull case
- Accelerating cost-cutting and brand disposals under new CEO Dave Lewis.
- Stabilising sales in North America, Diageo’s single largest market.
- Expansion in mass-market spirits, and high-growth ready-to-drink (RTD) and zero alcohol lines.
- Growth in lucrative emerging markets.
- Improving cash flows that supports debt reduction.
The bear case
- Tough consumer conditions that delay any sales recovery.
- Changing consumer tastes, with people reducing their alcohol consumption.
- Fresh US tariffs that impact lines such as tequila and whiskey.
- Weak margins due to changing product mix.
- Growing competition in key categories.
Are Diageo shares a buy?
Encouragingly for existing shareholders like me, Diageo’s latest trading update showed much-awaited signs of recovery. Organic net sales were up 0.3% in the three months to March (a fall of roughly 2.5% had been expected by analysts).
North America remained a problem, but head honcho Lewis assured the market that “actions are already underway to address this.” Signs of progress when FY results are released in a fortnight could be a landmark event in the firm’s share price recovery.
If its recent sales rebound continues, Diageo’s depressed valuation could also help its share price move higher. Its price-to-earnings (P/E) ratio of 13.3 times sits miles below the 10-year average of 20-21.
With dividends included, the company could provide a total return around 30% over the next year, if analysts are correct. It’s not without risk, but I think an investment in Diageo shares is worth serious consideration.
Should you invest £5,000 in Diageo Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Diageo Plc made the list?
Royston Wild owns shares in Diageo.
