Diageo (LSE: DGE) shares have had a difficult second half in 2018, and it might still be premature to invest in DGE fully. Although the share price is up nearly 5% over the past 12 months, year-to-date its shares are down about 1.3%.
So what should we expect from Diageo, the global spirits maker and brewer? Here are the pros and cons to DGE shares.
Pros for Diageo shares
With its diverse global exposure and brand portfolio, Diageo shares offer long-term growth potential. Such geographic diversification – especially into emerging economies, where consumers are increasingly showing brand loyalty – provides a relatively defensive investment opportunity.
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The strong brand names of Diageo contribute to increased volume growth in most markets and gives DGE pricing and competitive power within this non-cyclical market. DGE has over 200 strong brands, including Baileys, Captain Morgan, Don Julio, Guinness, Johnnie Walker, and Smirnoff.
Diageo management is also likely to consider partnership opportunities with Canadian cannabis firms, with an aim to offer marijuana-infused drinks. DGE’s competitors, Molson Coors Brewing and Constellation Brands, have recently announced acquiring stakes in Canadian cannabis companies. Although it is too early to say how a bet on “drinkable cannabis products” would pay off, Diego has a history of innovation in the sector. For example, in the UK Diageo has successfully turned new launches or brand extensions, such as Gordon’s Pink, Haig Clubman, and Smirnoff Cider, into category-toppers.
Cons for Diageo shares
In June 2018 Diageo announced a subdued earnings update with profits predicted to increase only by 1.4% over the coming year. Management also cited the uncertain environment regarding global foreign exchange (FX) fluctuations. DGE’s revenues from India and China have suffered considerably as their currencies have depreciated. Analysts are also concerned about any future development that could hamper personal consumption growth in DGE’s major markets, such as the US and Europe.
In most countries, alcohol is heavily taxed and facing an increasing public health scrutiny and warning. For example, in its efforts to reduce problem drinking, England – like Scotland – is considering the introduction of minimum unit pricing (MUP). Amidst the debate on whether the MUP policy would be useful in changing the behaviour of problem consumers, the drinks industry and analysts are concerned over its effect on sales and margins. In 2017 India introduced a “highway liquor ban,” restricting the sales of alcohol near motorways. The initial result has been a shrinking drinks market for DGE. Although the ban has recently been relaxed, it was a stark reminder of how government policy can easily affect alcohol sales.
The bottom line on Diageo shares
Despite concerns about increased public health warnings against and higher taxes on alcohol, Diageo management is committed to growing revenues, and the company’s fundamental story remains intact. If you also still believe in the bull case for DGE shares then you might, however, consider waiting for a better time to buy, such as a share price of closer to 2,000p. Diego’s 52-week price range has been 2,345-2,885p, and I believe the share price is likely to test this low again in the coming weeks.
