In the chaotic world of investing, where market sentiment can change almost overnight, finding a stock that offers stability and growth can be incredibly rare. Get into Diageo (LSE:DGE), a global titan in the alcoholic beverages industry, whose portfolio reads like a who's who of iconic brands. Diageo's share price has been falling for several years, but is a recovery due? I've taken a closer look.
The company
Founded in 1886, the company has been serving drinks and consistent returns to investors for more than a century. Today, with a market capitalization of £58.6bn, it is a heavyweight in the market. FTSE 100, offering a compelling story of resilience, courage and growth. It is true that in recent years, with changes in consumer habits and an uncertain economy, things have not gone so well. The share price has fallen more than 22% in the last five years alone.
However, a good investment consists of detecting opportunities. With the share price now hovering around £26, a discounted cash flow (DCF) calculation suggests it may be a staggering 31% below its fair value.
Taking a closer look at the price-to-earnings (P/E) ratio, the company appears to be trading at a decent value compared to its peers, with a ratio of 17.6 times, just below the industry average. In other words, even in a sector known for its premium valuations, the business may be a relative bargain.
The future
Unlike tech startups that promise exponential growth, this company clearly offers something more reliable: steady, consistent expansion. Analysts forecast annual earnings growth of 4.75% for the next five years. While this may not get your pulse racing, it's the kind of measured growth that compounds beautifully over time.
Over the past five years, the company has grown its profits by a very healthy 7% annually. This track record in various economic climates – from Brexit uncertainties to pandemic disruptions – demonstrates its ability to deliver reliable growth when many others fail.
For income-seeking investors, the company offers a dividend yield of 3.05%, outperforming many of its FTSE 100 peers. But is this dividend sustainable? With a 55% payout ratio, it certainly seems that way. This suggests there is more than enough strength in the balance sheet to generously share profits while retaining enough to reinvest in the business.
Diversity
For me, Diageo's strength lies in its unparalleled diversity of brands. From whiskey and gin to vodka and tequila, it seems to dominate all the major spirits categories. It's not just about having many brands; It's about having the right ones. Each one is a heavyweight in its class.
Risks
High debt levels may give some investors pause. But in the beverage industry, where brands are built over decades, that kind of influence is common. Companies often use their strong, stable cash flows to finance acquisitions and brand development. With a net profit margin of 19.67% and a track record of smart brand building, Diageo appears well equipped to manage this debt.
In general
In today's volatile market, where tech darlings can become tech flops overnight, Diageo offers something refreshingly different: a business as timeless and trusted as the drinks it sells. With deep value in Diageo's share price, consistent growth, generous dividends and an unrivaled portfolio of brands, I feel it has a long and successful future ahead of it. I will buy shares at the next opportunity.
