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For me, finding quality stocks to buy is much easier than deciding when to sell declining stocks. That being said, I recently sold one of my FTSE 250 holdings.
IDS: I did not sell
In June 2022, my wife and I bought shares of International Distribution Services (LSE: IDS), formerly Royal Mail. We paid 273.2p to participate in the UK's universal postal service provider.
Unfortunately, this trade soon went wrong, as the IDS share price continued to fall, continuing its decline from 600p in mid-2021. On October 14, it bottomed at 173.65p, almost £1 (or 36.4%) less than our entry price.
Founded in 1516 by Henry VIII, the former Royal Mail was hit by lengthy strikes in 2022-23. This strike caused enormous disruption to the group, accumulating enormous losses.
On 18 May 2023, the company revealed an annual operating loss of £1.04 billion and canceled its dividend. I almost sold then, but decided against it with the share price below 200p.
Ditch Non-Dividend stocks
Despite sharp declines in its share price, I maintained our stake in IDS and waited for events, perhaps more out of luck than good judgment. The shares have since come back to life, hitting a 2023 high of 291.2p on December 22.
Seeing this price increase, I decided to take the opportunity to exit the stock ex-dividend. We finally sold our IDS shares for 279.5 pa. After charges, this produced a 6.8% gain on our original investment, boosted by additional shares we had purchased with previous IDS dividends.
I consider myself lucky to have made a small positive return on this difficult investment. Although IDS boomed as parcel deliveries soared in Covid-hit 2020-21, labor disputes hit this business hard. And with no dividends expected until 2025, I'm forced to look elsewhere for income.
My investor hero, American mega-millionaire and philanthropist Warren Buffett, once said: “It's much better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Taking this advice to heart, I'm going to buy giant drinks. Diageo (LSE: DGE). It is one of the world's largest producers of alcoholic beverages, with more than 200 popular brands, including gin, whiskey, rum and stout. Every week, billions of drinkers drink and swallow Diageo products.
However, affected by the higher cost of living, quarterly sales growth has slowed, with declines in Latin America and the Caribbean. Following weak results on 10 November, the share price plummeted to a 52-week low of 2,719p.
On Friday (January 5), the stock closed at 2,765p, valuing this consumer goods Goliath at £61.9bn. This means its shares are trading at a multiple of 16.8 times earnings. In addition, they offer a dividend yield of 2.9% per year, covered 2.1 times by lagged earnings.
To me, these fundamentals look attractive to buy into one of the real powerhouses of the FTSE 100. Sure, these shares aren't cheap, but the quality generally sells for a premium price, as do Diageo's high-end brands.
Down 24.3% in one year, but up 0.3% in five years, this seems as good a time as any to jump on the Diageo bandwagon. Therefore, I will buy a stake as soon as regulations allow (the middle of next week). And I hope this investment turns out better than my IDS trade!
