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It has been a difficult few months for the beverage giant's shareholders Diageo (LSE: DGE). But the latest dividend forecasts mean this FTSE 100 The stock is now on my radar as a possible buy.
I believe this high-quality business may be offering a unique opportunity for long-term investors to consider buying at an attractive valuation. This is why.
Diageo Dividend Forecasts
City analysts expect the owner of Johnnie Walker and tankray to deliver a payment of 80 pence per share for the 2023/24 financial year. This gives a dividend yield of almost 3%.
Those same broker forecasts suggest the company's 25-year record of dividend growth will be maintained in 2024/25, with a payout of 84 pence per share. This could give a return of 3.1%.
These dividend yields are not particularly high compared to some FTSE shares. In fact, the index itself offers an average return of around 3.8%.
However, a 3% yield is above Diageo's average. High profit margins and a long history of growth mean the stock has historically commanded a premium valuation.
My research suggests that the last time Diageo earned more than 3% was in 2015. Before that it was 2011.
I think the current share price weakness may offer a buying opportunity. But it's important to note that this business faces some obstacles right now.
Livestock reduction fears
The stock price fell sharply in November when new CEO Debra Crew surprised investors with a profit warning.
Crew said sales in Latin America and the Caribbean (LAC) were expected to fall 20% during the second half of 2023, reversing a large gain seen last year.
The problem seems to be that Diageo distributors in the LAC region have seen a slowdown in local sales. As a result, they were left with too much stock, so they are ordering less from the company than expected.
Assuming that drinkers in these markets do not permanently reduce their consumption, this should only be a temporary problem. But I think there is a risk that things will get worse before they start to get better.
Why might you buy?
Stock-out issues have hit Diageo before, but eventually the business has always returned to its long-term growth trend.
As the world's largest producer of spirits, the group has an impressive and valuable portfolio of brands. This portfolio is combined with global marketing and distribution networks that give the company access to virtually the entire world's population.
These factors have driven consistent growth for many years and, in my view, provide an important defensive moat for the business.
Last year's share price drop means Diageo shares are trading at 18 times expected 2023 earnings. By my calculations, that's the lowest level since about 2012.
While I can't rule out further near-term problems, I think a reasonable amount of bad news has already been priced into the share price.
For investors looking for reliable, long-term income growth, I think the stock could offer value at current levels. Diageo is on my list as a possible purchase.
