Diageo (LSE: DGE) shares have struggled to perform in 2023. The stock is down 22% for the year and 25% over the past 12 months. The primary driver behind its recent poor performance has been uncertainty surrounding its profitability moving forward.
Given the fall, is now the time to add this UK beverage stalwart to my portfolio? I’m not convinced.
Diageo’s value
Looking at the shares, I struggle to see any immediate value, even after the big share price fall. Currently trading on a price-to-earnings (P/E) ratio of 17, the stock isn’t exactly cheap. The FTSE 100 is currently averaging a P/E ratio of around 14.
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That said, when I look at competitors Constellation Brands and Molson Coors, which trade on P/E ratios of 29 and 51 respectively, the value proposition does become clearer.
The stock offers a dividend yield of just 2.8%, which is nothing to write home about. The FTSE 100 average comes in at over 4%. I understand Diageo may be underpriced compared to its US peers, however, against the backdrop of the UK market I struggle to see any striking value in the shares.
Brand strength
Diageo has over 200 brands spanning 180 countries, including household names such as Johnnie Walker, Tanqueray, Smirnoff, and Guinness. Having such a diverse range of leading brands is a huge asset to Diageo in my eyes. The UK is the world’s biggest consumer of Guinness, and I can’t see this stopping any time soon!
The geographical diversification is also a big plus for Diageo. This is because if one market underperforms, another can usually compensate in growth.
Worrying outlook
That’s all good. But a few weeks ago, Diageo released a trading update ahead of its 2023 Capital Markets Day. It warned that growth in operating profits would slow for the second half of 2023, largely driven by a slump in sales in Latin America and the Caribbean. To be precise, it expects sales within these regions to fall by 20%, putting pressure on profits.
CEO Debra Crew reported that “macroeconomic pressures have worsened and that caused lower consumption and really more consumer downtrading than what the team was expecting,” shedding some additional light on the poor results.
There are also other issues that worry me about Diageo. The tragic death of veteran CEO Ivan Menezes meant that ex-COO Debra Crew had to quickly step up some weeks earlier than planned.
Crew is an experienced replacement, however, Menezes had led the business for over 10 years and it could take some time for the new boss to settle in.
The verdict
Diageo shares have fallen, but in my opinion, they still aren’t cheap enough for me to load up on them in my portfolio. The brand is undoubtedly a UK stalwart in the beverage industry and its many household brand names is a testament to that. However, in my eyes, the unclear value coupled with the uncertain outlook is too big to overlook. Therefore, I won’t be buying any shares today.
