The Diageo (LSE DGE) share price crashed around 18% after the FTSE 100 drinks giant issued a shock profit warning on 10 November. Investors weren’t prepared for news that Latin American and Caribbean sales had dropped more than 20% year on year, and they sold in droves. So naturally, I bought the stock.
I’d been looking for an affordable entry price into Diageo for years, and suddenly I had it. Yet I was also wary. I’ve purchased stocks in the wake of a profit warning before, only to be hit by a second wave of bad news. And sometimes a third.
I managed to contain my excitement until 24 November, then dived in at £28.08. I thought it was a no-brainer buy trading at around 18 times earnings. That’s well below the 23 times that had put me off for years.
Good stock. Bad news. Perfect
I decided Diageo was a great British company, and any setback would be short-lived. It sells Johnnie Walker, Bailey’s, Guinness and a heap of other top alcohol brands in every region globally, and if the world was suddenly about to stop drinking, well that was news to me.
It has been hit by the cost-of-living crisis though. Diageo has consciously shifted into the premium end of the drinks market. The move made sense when people had money in their pockets, less so when they’re counting the pennies. Many are either drinking less as a result or trading down to cheaper brands.
Inflation also pushed up Diageo’s input costs, while forcing it to spend more promoting its brands, squeezing margins.
I calculated that this made now the right time to buy a solid blue-chip stock like this. When the global economy recovers – which it surely has to at some point – customers may celebrate by splashing out on high margin premium brands again.
FTSE 100 recovery play
Sometimes I wonder whether today’s drinking culture will endure. Generation Z consumers seem more likely to be abstemious. It would be a huge cultural shift, but it could happen. I’m keeping half an eye on that threat.
My Diageo shares have shown signs of life, but have been slipping lately. So far, I’m up 2.5% but these are early, early days. After diving in on weakness, I’m giving the share time to regain lost ground. Over 12 months, the shares are still down 15%.
It’s never been one of the biggest dividend payers and currently yields just 2.76%, below the FTSE 100 average of 3.9%. The board has been progressive though, lifting the 2023 payout 5% to 80p per share. However, I bought Diageo for growth and I’m confident that will come. It still looks cheap, by its standards, trading at 17.78 times earnings. I think it’s a no-brainer buy and I’d purchase more shares if I hadn’t already got my fill.