After decades of great returns, Diageo (LSE: DGE) shares have taken a bit of a hit in the last 12 months. The stock has dropped sharply since April, and now it’s sitting at a 52-week low. Should I buy into the FTSE 100 firm at this cheaper price?
A new record
I don’t own Diageo shares but, like many I’m sure, I wish I did. The firm has grown to a £75bn valuation with its brands like Guinness, Johnnie Walker, Tanqueray and Smirnoff stocked in pubs, bars and restaurants all over the globe.
That success would have translated into superb returns too, of course. If I owned a stake here 20 years ago, I’d have seen around a 600% return. I’d be pretty pleased with six times my investment back, that’s for sure.
And what’s interesting for me today is that the success isn’t slowing down. Revenue is still climbing, with sales of £11.8bn in 2020 growing to £12.7bn in 2021 then leaping to £15.5bn in 2022.
Business is booming, and with the stock at a 52-week low, I’m tempted to buy in while it’s still cheap. But first, let’s dig into exactly why the shares have fallen.
16% discount?
The downturn started in April when Diageo faced two separate issues. The first was the tragic passing of CEO Ivan Menezes. After 10 years in charge, he had been due to step down anyway, but the death was unexpected and the shares dropped on the news.
At the same time, an ugly legal spat over one of its celebrity ventures had made the headlines. It seems Sean Combs (P-Diddy) has been unhappy with the firm, saying it’s not been paying enough attention to his brands of vodka and tequila.
The result is that the shares are down 14% from the high reached last August, and 16% down on the all-time high in 2021.
The salient point here for me though is that these are temporary issues, not affecting the core business. So, a 16% reduction in share price might be a 16%-off sale.
Am I buying?
A final tick in the ‘buy’ column here comes looking at the firm’s prospects. Looking ahead, I expect Diageo to navigate the cost-of-living crisis without too much trouble. Alcohol is famously a ‘defensive’ industry. People tend to drink whether the economy is booming or is in the gutter.
Equally, I like its premium positioning. If alcohol usage declines, like tobacco has, then Diageo’s tagline of “drink better, not more” shows it can sustain revenues by targeting the higher end of the market.
I wouldn’t go so far as to say the shares here are a complete bargain, but I think the current price is good value. I’ll consider opening a position soon.
