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I’m thinking about whether to add Diageo stocks to my portfolio, as the storm clouds of global economic turmoil gather.
Diageo is a London-based giant in the alcoholic beverage industry, known by household names such as Guinness, Smirnoffand Johnnie Walker.
And while past performance is no guarantee of future results, it has proven remarkably resilient during previous economic crises.
Bottled resilience
So what makes Diageo potentially a fortress against economic downturns?
Let’s start with your industry. The alcohol business has a long history of weathering financial storms. Even in difficult times, many still find solace in a glass or two. That makes Diageo’s wide range of products, from luxury to affordable, a trusted choice for consumers of all types.
During the 2007-08 financial crisis, as many companies faltered, Diageo saw its revenues rise from £7.26bn in 2006 to £9.94bn in 2010.
During the pandemic era, the story was more or less the same. Revenue fell only slightly, down 8.7% to £11.8 billion, in 2020. By June 2023, the company’s revenue had soared to a staggering £17.1 billion. pounds sterling.
Raising the bar and actions
But there is more. Diageo recently initiated a $1 billion share buyback program, a strong indicator of its financial health and optimistic future prospects.
Additionally, CEO Debra Crew is optimistic about the company’s ability to address current macroeconomic challenges and looks forward to “a gradual improvement in both organic net sales and operating profit growth”in the next fiscal year.
Scrutinizing the numbers
I don’t need to take a drink of Captain Morgan appreciate the good performance of Diageo’s finances.
With a market capitalization of £68.5bn and an enterprise value of £83.86bn, the company is a heavyweight in the drinks industry. Its profit margin stands at an impressive 21.8%.
However, it is crucial to keep a couple of risks in mind. Firstly, the company’s total debt stands at £17.3bn, which could be a cause for concern considering how interest rates have skyrocketed since 2022.
Second, the stock has a price-to-earnings (P/E) ratio of 18.5, which seems a bit high and leaves it at risk of a correction if results disappoint.
What is the verdict?
However, I think Diageo’s historical resilience, diverse product offering and healthy margins make it a tempting option for my portfolio.
The company isn’t trading at bargain-basement valuations, but I don’t care. In the wise words of Warren Buffett: “It is much better to buy a wonderful company at a fair price than a fair company at a wonderful price..” I think this perfectly sums up the investment case for Diageo.
Given its strong financials and historical resilience, I am convinced that Diageo will serve as a financial bulwark in my portfolio. I plan to add some shares as soon as I have some extra cash.
