Diageo (LSE: DGE) shares are normally pretty stable. Yet last week, they took a big hit. Is this a buying opportunity for long-term investors like myself? Let’s take a look.
Why Diageo’s share price fell
The share price fall last week can be attributed to Diageo’s interim results, which were posted last Thursday. But the results were by no means terrible.
For the six months to 31 December, reported net sales were up 18% year on year to £9.4bn, thanks to strong organic net sales growth (+9.4%) and favourable impacts from foreign exchange.
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Meanwhile, pre-exceptional earnings per share were up 15.2% to 98.6p. On the back of this performance, the dividend was increased by 5% to 30.83p per share.
However, there were some issues that spooked investors. One was slower growth in North America (which accounted for around half of the company’s operating profit in 2022, according to RBC). Here, organic sales grew by just 3% year on year versus 14% a year earlier.
Another issue was significantly higher interest payments. For the half year, Diageo’s net finance charge rose to £292m versus £180m a year earlier.
Well-positioned for future growth
Looking at the H1 results, I don’t see anything that worries me too much.
The slowdown in North America is not particularly surprising, to my mind. Back in the second half of 2021, consumers were cashed up from stimulus cheques and a lot of their spending was focused on goods as opposed to experiences. So H1 comparables were always going to be tough.
Meanwhile, the 5% increase in the dividend (as well as share buybacks announced by the company) suggests management is not too concerned about rising interest payments.
It’s worth noting here that management was confident the company can deliver on its medium-term guidance.
We believe we are well-positioned to deliver our medium-term guidance of consistent organic net sales growth in the range of 5% to 7% and sustainable organic operating profit growth in the range of 6% to 9% for fiscal 23 to fiscal 25.
Diageo CEO Ivan Menezes
Buying opportunity
So I’m inclined to view the recent pullback as a buying opportunity. This is a high-quality company with strong brands, a high level of profitability, and an excellent dividend growth track record (Diageo has registered more than 20 years of consecutive dividend growth).
And the company looks set to benefit from a number of powerful trends in the years ahead, including the global ‘premiumisation’ trend and rising wealth in the emerging markets.
With the share price currently under 3,500p, the forward-looking price-to earnings (P/E) ratio is now near 20, which I think is very reasonable.
Of course, there are risks to consider here. Trading conditions may be challenging in the short term, due to consumer weakness. And if interest rates keep rising, profits may be squeezed by interest payments.
All things considered however, I like the risk/reward setup here. If I didn’t already have a large position in Diageo, I would be buying the shares today.
