For a long time, I liked the look of drinks giant Diageo (LSE: DGE), but not the price. Then the Diageo share price fell to what I thought was an attractive level and I bought a stake, which I still own.
Since then however, the share has continued to lose momentum. Business problems have mounted. Is this weakness a potential bargain for an investor with a long-term approach like me? Or should I avoid buying any more shares in the Guinness brewer?
Latest results paint a mixed picture
The company released its interim results Tuesday (4 February) and I think they contained both good and bad news. Net sales, operating profit, operating profit margin and earnings per share all declined year-on-year.
On the plus side though, free cash flow grew. Organic net sales grew. That was due to price and the mix of products sold. Volumes actually declined slightly overall, with all regions except Asia Pacific recording lower volumes.
But I think that underlines the appeal of Diageo’s portfolio of premium brands, which gives it pricing power. That is a big attraction of its business model for me.
A long road ahead
Dan Lane, lead analyst at Robinhood UK, pointed to ongoing strength in the performance of Guinness, while he reckoned that the company’s spirits business “should have its day again”.
In the six months under review though, spirits net sales declined in Europe, Asia Pacific and Latin America and the Caribbean. There was, at least, strong growth in tequila sales.
That weak spirits performance overall shows why Guinness (which grew strongly) is a critical counterbalance in Diageo’s portfolio strategy.
Still, that concerns me. Beer sales are in long-term decline globally. Guinness has done a great job marketing itself and growing demand, but I do not know how long it can successfully push forward in a market that is going the other way.
Meanwhile, Diageo’s spirits business performance looks increasingly problematic to me. This is not the Latin American sales wobble seen last year, but now a broader-based decline for many pricy spirits across multiple and varied markets.
That suggests economic weakness is hurting sales. I see a risk that could continue.
Getting Diageo back to strong growth mode is going to take years, in my opinion, and so far current management has not proved it is up to that job. Time will tell.
Potential bargain, but I’m not buying
Diageo has raised its dividend per share annually for decades. The interim dividend was held flat, unusually, so it remains to be seen at the full-year point whether the total dividend continues to grow.
But the flat interim dividend unsettled me, the weak spirits sales and potential for things to get worse concern me, geopolitical risks like tariffs hurting demand for international spirits are high and I remain unconvinced that current management is able to deliver in what seems like a tough market environment.
So while the Diageo share price may yet come to seem like a bargain in retrospect, the risks are increasingly unsettling me as an investor. I will not be buying any more shares in Diageo for now.
