For Diageo (LSE:DGE) shareholders, the long-awaited recovery has started to resemble Waiting for Godot. In that play, the characters wait for someone — or something — that doesn’t come.
The arrival is always promised, but never quite arrives.
This effect can be seen with the Diageo share price, which occasionally shows sporadic bursts of momentum before stalling and falling even further. A pattern of hope and disappointment basically, like in the play.
I escaped the cruel, endless loop 18 months ago when I sold the FTSE 100 stock. But I bought back in a few weeks ago, with Diageo near a 14-year low.
What on earth was I thinking?
The oil tanker might be turning
To begin, here’s a list of the main reasons why I sold Diageo:
- Stagnant sales
- Younger people drinking less alcohol
- Unrelenting cost-of-living pressures
- Stretched balance sheet
- Dodgy dividend growth prospects
- Management issues
Admittedly, some of these concerns still exist. Management expects full-year organic net sales to fall 2%-3% due to ongoing weakness in US spirits and Chinese white spirits. That’s not inspiring stuff.
Meanwhile, Gen Z consistently ranks health and wellness way above alcohol-driven socialising in their list of priorities. And they’re more likely to meet a new partner at the gym than a pub nowadays.
Plus, the cost of living continues to rise across the UK, US, and Europe. Is this a new normal that will last for many more years? Only time will tell.
Turning to the second half of the list, though, I’m more optimistic. CEO Dave Lewis has come in and is taking hard decisions to turn the tanker around, including cutting costs, asset disposals, and a 50% cut to the interim dividend.
As such, I’m optimistic that Diageo’s balance sheet will be strengthened. And, in my opinion, an outsider like Lewis will take a far less rose-tinted evaluation of underperforming brands than executives involved in building the current portfolio.
Finally, Gen Z are a paradoxical bunch, as they might be drinking less but they haven’t abstained completely. Look at the popularity of Guinness, which is thriving even as beer sales fall, and canned cocktails, which Diageo has earmarked as a growth opportunity.
Artemis sees value
Looking ahead, I think investors are underestimating the improvements that Lewis could bring in future years. Artemis Income Fund, which has a tremendous record since launch 26 years ago, thinks so too and recently bought Diageo shares.
Manager Andy Marsh says the dividend cut has removed some balance sheet risk, as well as making necessary changes within Diageo somewhat easier (because shareholders are sharing some of the pain).
Marsh says such actions have increased the company’s future cashflow and dividend prospects. And the market is currently underappreciated this.
What’s the latest price target?
According to analysts, the current share price is too low — their average price target is 32.7% higher.
Whether they’re right or not is unknowable at this stage, of course. But if they are, investors buying £5,000 worth of shares could see their stake rise to roughly £6,635 by this time next year, excluding dividends.
While I wouldn’t bet the farm, I think Diageo is worth considering. Godot could actually turn up at the end of this play.
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Ben McPoland owns shares in Diageo.
This story originally appeared on Motley Fool
