The share price of FTSE 100 drinks giant Diageo (LSE:DGE) has fallen 23% this year. It has suffered as the coronavirus has caused bars to shut globally. However, as the world’s economies begin to recover, I believe it will not be long before revenues and profits rise again. This could be the perfect to time invest.
Pricing power
Diageo is the fifth biggest company in the FTSE 100. It is famous for popular drinks brands, such as Johnnie Walker, Guinness, Smirnoff, Baileys and Captain Morgan. Regardless of the state of the economy, consumers will still purchase their favourite tipple.
Consumer brand loyalty enables Diageo to charge a premium for its products without affecting sales. This pricing power contributes towards its impressive profit margins. This year, organic operating profit before exceptional items was just under 20%. This is impressive considering the trading challenges it has had to overcome. Prior to this year, pre-tax profits were up 40% since 2006.
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Large share price falls are rare for a company with such an established track record of increasing profits. This is why I believe this could be the perfect time to invest.
Diversity
While pubs and restaurant chains have been closed in the UK, the FTSE 100 drinks giant has benefited from an increase in drinking at home. Supermarket sales of alcohol shot up by two thirds in preparation for lockdown. But revenues will begin to return to normal now the pubs and service industry has re-opened.
Beyond the UK, DGE products are enjoyed around the globe. Prior to lockdown, revenues had risen in North America and Europe. And long term the company is well positioned to benefit from the growing middle classes in China and India. I do not think the depressed share price reflects this vast potential and this could be an excellent opportunity to invest.
Income champion
Companies in the FTSE 100 have been quick to suspend or cancel this year’s dividend payments in response to the coronavirus. However, Diageo has continued its commitment to paying a dividend despite these challenges. This maintains a dividend growth record that goes back to 1990. Free cash flow of circa £1.6bn is more than sufficient to sustain the dividend payment at its current level.
Despite its impressive dividend growth record, Diageo has had a relatively low dividend yield of 2% in the past few year. However, due to the depressed share price, this yield has risen to nearly 3%. As an income investor I have previously not invested in Diageo due to its low yield. However, the enhanced yield is enticing and this could be the perfect time to invest for income seekers.
Fund manager’s favourite
It would appear my enthusiasm to invest in Diageo is shared by star fund manager Nick Train. Despite the falling share price, it became the top holding in his UK Investment fund in July. This implies that he sees that falling share price as an opportunity to top-up his holding and not a reason to be fearful.
Diageo is a permanent fixture on my watchlist. Global diversity, strong brands, good profit margins and secure dividends are exactly what I look for when I invest in a company. I think the current depressed share price is an excellent opportunity to invest.
