The Diageo (LSE:DGE) share price fell further yesterday, along with almost every company listed on the FTSE 100. As the coronavirus outbreak deepens and oil production conflicts grow, share price volatility across the globe has intensified. In just 12 days, the Diageo share price plunged almost 15% by close of business yesterday. So far today it has regained 3%.
Diageo is a transnational conglomerate producing many popular alcoholic drinks. Household brands include Baileys, Smirnoff, Guinness, Johnnie Walker and Captain Morgan.
After enjoying a steady rise from March to September last year, the Diageo share price has steadily fallen in the ensuing months. It’s now down 33% from its September high. It has a £59bn market cap, £13bn revenue and a dividend yield of 2.9%.
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The knock-on effect that the Covid-19 pandemic is having on global businesses is intense. Supply chains are disrupted, employees restricted from working, and consumers are much less likely to spend.
With its supply chain affected, Diageo estimates a £225m-£325m blow to sales and £140m-£200m reduction in operating profits in the 2020 financial year. Depending on how long the virus outbreak lasts, these estimates could change.
Living for the moment
When the pandemic fades and life returns to normal, will people be inclined to adopt a healthier lifestyle?
It seems to me that younger people have a much more health-focused outlook on life than the 40 and 50-somethings. Fewer of them smoke or drink and many more have committed to plant-based diets, nutrition and exercise plans. The importance of healthy eating and drinking water is now taught to children from a very young age.
Once coronavirus is a thing of the past, I do think people will want to take better care of themselves. This might be bad news for shares in alcoholic drinks giant Diageo. But then again, the company could easily evolve to give consumers what they want.
Diageo already acquired Seedlip, the world’s first non-alcoholic spirit. At the time, Seedlip was considered a product innovation in fast-moving-consumer-goods.
On the flip side, many people might want to celebrate once normality resumes and alcohol sales could skyrocket.
Ride out the storm
Large falls in the financial markets can terrify individual investors. But it’s important to remember that these are generally fuelled by large institutions buying and selling. Institutional investors such as hedge funds, banks and insurance companies want to limit their losses. They go both long and short on stocks. By going long, they’re expecting the company share price to rise and by going short they’re expecting it to fall! Much of this occurs automatically through algorithmic trading, where electronic trades are triggered by pre-determined prices.
This week has seen European stocks suffering their worst daily losses on record, but I think the market may have further to fall in the coming weeks.
Shold that worry anyone wondering whether to invest in Diageo? Not really. All in all, Diageo is a pretty healthy company with a global presence. Its price-to-earnings ratio is 18, which makes me think it’s overpriced in today’s climate, but this could fall further. It’s good to be patient and snap up your favourite stocks when the price is just right.
