Was the death of Diageo (LSE: DGE) shares greatly exaggerated? After a shocking 66% fall that had investors rushing for the exits, the mood music has done a massive 180 in recent months. Let’s see what a £9,999 investment would have increased to.
For context, the bottom was hit in April. The shares were already struggling, beaten down by weakening demand and worries about the long-term future of alcohol. And when the new CEO enacted a raft of streamlining and cost-cutting measures, the share price fell to a 15-year low of 1,362p.
Things have been looking brighter since. The share price has been rapidly climbing in recent months, achieving a 31% rise from bottom to top. No company on the FTSE 100 throughout that time performed better (though the share price has dropped a few percent since).
A £9,999 stake bought in April is now worth £12,033 (with an interim dividend bumping the total return even higher).
What happened here? And could now be still a great time to buy in with the shares so far from their previous high?
What happened?
The good cheer has been spearheaded by CEO Sir Dave Lewis who was handed the job in January. Best known for turning things round at Tesco during a rough patch, the man nicknamed ‘Drastic Dave’ took his trademark kitchen sink approach. This involved getting all the bad news out the way in one go. So far, it looks like the approach is working.
He’s helped, of course, that Diageo boasts a number of super popular brands. Guinness keeps going from strength to strength and – crucially in today’s world of the ‘sober curious’ crowd – has a great-tasting (my opinion) zero alcohol version.
In terms of sales volume, demand’s still weak in China and North America – an ongoing concern to be aware of – but it has been offset by strength in Europe, Latin America and Africa.
Good news all round then? Not quite…
A buy?
The underlying issues that have caused the recent decline haven’t gone away. And there’s only so much a company can do about declining consumer demand for its products.
Put simply, the worry is that folks are drinking less. This takes the form of younger generations who drink smaller amounts, less frequently, or simply can’t afford it. There’s a growing health-conscious crowd who are saying no to the booze too, which dovetails with GLP-1 drugs like Wegovy which seem to inhibit desire for the stuff.
While the sales figures are only showing minimal impact so far, the writing could be on the wall for the long-term decline of alcohol.
Does that make Diageo a bad buy? Not necessarily. Cigarettes showed a similar trend up to the 1980s, yet the most rewarding FTSE 100 stock to own since then was British American Tobacco. But it’s a risk to be aware of.
Overall, Diageo’s heading in the right direction and could be worth considering today, in my view.
Should you invest £5,000 in Diageo Plc right now?
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John Fieldsend owns shares in Diageo and British American Tobacco.
