I reviewed Diageo (LSE: DGE) shares a couple of months ago with a view to buying them for my holdings. At the time I decided to hold off. However, I’ve noticed that the Diageo share price has continued to fall! So what’s been happening and is there an even better opportunity now to buy the dip? Let’s take a look.
Diageo shares under pressure
Macroeconomic volatility, including soaring inflation and rising interest rates have hampered most businesses, including Diageo. Rising costs, a cost-of-living crisis, and supply chain issues haven’t helped the spirits maker.
To add to this, Diageo issued a profit warning in a trading update a couple of weeks ago. This prompted its share price to fall almost 15% in a week!
As I write, Diageo shares are trading for 2,824p. Over a 12-month period, they’re down a whopping 25% from 3,786p at this time last year.
Buy the dip or more to come?
Digging into its recent update, Diageo said revenue and profit will slow due to weaker performance in its Caribbean and Latin America markets. Operating income is slated to grow 5%-7%, compared to the previously forecast 6%-9%.
So what does this mean for Diageo’s valuation at present? Well, the shares trade on a price-to-earnings ratio of 17. This is still higher than the FTSE 100 average of 14. However, it’s lower than the shares have been for some time.
From a bullish perspective, I reckon there’s still plenty of upside to owning Diageo shares. The business has forecast 5% earnings growth for the next few years. However – as we’ve seen recently – forecasts don’t always come to fruition. In addition to this, the firm’s superb brand power and wide footprint can’t be ignored. These aspects could help boost performance and growth.
Furthermore, at present, a dividend yield of 2.9% would help boost my passive income. However, I understand that dividends are never guaranteed.
On the other side of the coin, the tragic death of long-time CEO Ivan Menezes could dent investment viability and the Diageo share price, too. After all, he played a huge part in successfully leading the business for many years.
Finally, with no real end in sight to macroeconomic headwinds, I can’t help wondering if downgraded forecasts is something we’ll see more often — at least in the medium-term — from Diageo. I’ll be keeping a keen eye on future performance updates.
My verdict
I definitely think there’s an opportunity to buy Diageo shares at cheaper levels now with a view to longer-term growth and returns. This is why I’ll look to snap some up when I next have some cash to spare.
Despite Diageo’s recent update, I can’t ignore the fact it is a quality business. It has a solid track record, as well as enviable brand power and a huge footprint. The Diageo share price dip can be attributed to external factors out of its control. However, I reckon it has thrown up a great chance for investors like me to get on buy cheaper shares. Once volatility subsides, I reckon the shares will rise once more.
