Diageo (LSE: DGE) shares have been a lousy investment lately. Over the last three years, they’ve lost more than half their value. City analysts do anticipate a rebound in the share price though. Here’s a look at some forecasts.
Analysts see the potential for gains
At present, the average analyst 12-month price target for Diageo is around £19.80. That’s around 29% above the current share price.
If it was to be hit, a £10,000 investment today would be worth around £12,900 and that’s before income. Looking at the stock’s dividend yield, dividends could add another £400 or so.
Sentiment needs to improve
Of course, there’s no guarantee that the share price will hit that level any time soon. For it to rise 29%, we’d need to see sentiment towards the FTSE 100 stock improve dramatically.
Right now, Diageo’s hugely out of favour. Not only do investors have concerns about long-term growth in a world where people are drinking less due to health concerns and GLP-1 usage but there are also concerns about the company’s balance sheet, which is loaded with debt.
Three reasons to be optimistic
But there are reasons to be optimistic looking ahead. One is that new CEO Dave Lewis is moving away from the old ‘premiumisation’ strategy towards a value-driven mass market strategy. This could help to boost top-line growth. Given that consumer spending is being squeezed today, I think it’s a smart strategy.
Another is that Lewis is making moves to cut costs. Recently, it came to light that some teams within the group are looking at headcount reductions of 20%-30%. This could potentially have a material impact on profits in the years ahead. It could also free up cash to pay down debt.
One other thing to note is that the valuation is quite low today. Looking at earnings forecasts for the financial year ending 30 June 2027, the forward-looking price-to-earnings (P/E) ratio is less than 13.
At that earnings multiple, there’s definitely scope for an upward valuation re-rating if Diageo can show an improvement in business performance. Over the last decade, it has traded at much higher valuations.
Is Diageo a good investment?
So are the shares worth considering for a portfolio or holding if someone already owns them? I believe so – I’ll be holding on to mine.
I’m not expecting them to suddenly shoot up 29% to £19.80. As I said, we need to see sentiment improve and this could take time. But taking a three-to-five year view, I see potential. If Lewis can boost top- and bottom-line growth, the shares should provide decent returns given the low valuation today and the solid dividend yield.
There are plenty of other stocks that could be worth considering as well though. And if I’m honest, Diageo’s not my top pick at the moment.
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Edward Sheldon owns shares in Diageo
