Diageo plc Could Be Worth 2124p!

Shares in Diageo plc (LON: DGE) have huge potential and could deliver a total return of 20%+. Here’s why.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

659px-DIageo_Logo.svg

It’s been a tough year for investors in Diageo (LSE: DGE), with the alcoholic drinks company seeing its share price fall by 9% since the turn of the year. That pretty much eradicates all of the 11% gains the company made during the course of 2013. In fact, since the start of 2013, Diageo has underperformed the FTSE 100 by around 16%. However, now could be a good time to buy shares in the company and they could rise by 17.5%. Here’s why.

Resilient Growth

One of the major attractions of investing in Diageo is its highly resilient earnings profile. Indeed, Diageo seems to deliver impressive levels of profitability over the long run whether the global economy is performing well or not. Furthermore, its hugely diverse geographic spread ensures that even if one part of the world is experiencing economic difficulties, other parts have the potential to pick up the slack.

Should you invest £1,000 in Diageo right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Diageo made the list?

See the 6 stocks

This bodes well for investors moving forward, since although Diageo does have a substantial exposure to Europe, strength elsewhere in the world should help the company to overcome slow growth in a number of its markets.

Income Potential

Although often viewed as a strong income play, Diageo seems to be rather mean when it comes to the proportion of profit that it pays out as a dividend. For example, its payout ratio currently stands at just 55%, which appears to be rather low. Certainly, the company needs to invest in new plant and machinery, but for a mature business operating in a mature industry, paying out just 55% of profit seems rather low.

Were Diageo to pay out a higher percentage of profit as a dividend, say 65%, then it could strike a more favourable balance between the reinvestment needs of the business and the income desires of shareholders. This could increase demand for shares and maintain the dividend yield at its current 3% level.

Assuming this is the case, it could mean that shares trade at a price of 2124p (as a result of a higher dividend still equating to a yield of 3%), which would mean a capital gain of 17.5% from its current price level. When the 3% yield is added to the capital gain, a 20%+ total return seems very achievable.

Should you invest £1,000 in Diageo right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Diageo made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 30% in weeks, does the BAE Systems share price still offer value?

The BAE Systems share price has been on a tear over the past couple of months. This writer sees limited…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Hunting for shares to buy as the market trembles? Remember this!

After a choppy week in global stock markets, our writer goes back to basics in his hunt for bargain shares…

Read more »

Investing Articles

3 simple principles to help build wealth in an ISA

As a new tax year opens up new ISA allowances for many investors, our writer shares a trio of things…

Read more »

Investing Articles

US trade tariffs: what they could mean for UK shares like Ashtead, Compass Group, and Experian

US trade tariffs continue to rock global markets, and the UK is no exception. Our writer considers how a new…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Dividend Shares

The Trump slump has smashed these FTSE 100 shares!

After a rough week for US and UK shares, investors have been shaken. But now these FTSE 100 stocks have…

Read more »

Investing Articles

£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

Rolls-Royce shares have been on fire since April 2020. Part of this is the result of pandemic restrictions lifting, but…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

£10,000 invested in Tesla stock at its peak in 2024 is now worth…

Over the last few months, Tesla stock has lost nearly half its value. Here, Edward Sheldon explores a few takeaways…

Read more »

Investing Articles

Is the S&P 500 heading for an epic stock market crash?

Our writer shares his thoughts on a very crazy time for the S&P 500 and the wider stock market. How…

Read more »