When it comes to the FTSE 100 index’s heavy hitters, you don’t get much bigger than Diageo (LSE: DGE). By almost any measure, the drinks giant is a Goliath on a global scale. This great British success story has top brands, top products, and top people. And if/when the war on Covid-19 is won, the world will probably want to party. But the Diageo share price is close to record highs, so has it peaked — or is this just a pause or plateau?
Diageo is a global giant
When it come to exchanging cash for alcohol, Diageo is world class. The British business — founded in 1997 by the merger of Grand Metropolitan with Guinness Brewery — sells its products in bars, pubs, nightclubs, and restaurants all around the world. Its leading brands of alcoholic drinks include J&B and Johnnie Walker whisky, Smirnoff vodka, Captain Morgan rum, Baileys Irish cream, Gordon’s and Tanqueray gin, and Guinness stout. Employing almost 28,000 people, Diageo sells more than 200 drinks brands in over 190 countries. Its origins go all the way back to 1627, so it’s been in business for close to four centuries. Yet the Diageo share price slumped as Covid-19 swept the globe last year.
The Diageo share price dives and rebounds
On 3 September 2019, the Diageo share price hit an all-time closing high of 3,625.5p. The following day, the stock hit its intra-day peak of 3,633.5p. DGE shareholders had never had it so good. But then along came coronavirus to ruin their party. As the world went into lockdown, this stock dived. During March 2020’s meltdown, the shares hit an intra-day low of 2,050.6p. In other words, they had almost halved (-43.6%) from a record high in under six months. Ouch.
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On 12 June last year, I argued that Diageo was an outstanding business worth buying into at 2,783p a share. By the end of 2020, the Diageo share price had recovered to 2,878p. Today, as I write, the stock trades at 3,632.5p, 33.5p below (-0.9%) its all-time high of 3,666p, hit on 30 September. Today, the group is valued at £84.6bn, making it a FTSE 100 super-heavyweight. But has this stock now hit a peak or a plateau?
This stock is no longer cheap
By FTSE 100 standards, this stock is not an obvious bargain. Based on the current Diageo share price, it trades on a price-to-earnings ratio of 32 and a modest earnings yield of 3.1%. Also, the dividend yield of 2% is roughly half the FTSE 100’s forecast yield of 4.1% for 2021. Then again, 35 years of investing experience has taught me that quality comes at a price — and this is a fabulous business. What’s more, when the whole world starts partying post-coronavirus, Diageo could enjoy a sizeable earnings boost. But if Covid-19 keeps mutating and hangs around, then this could be bad news for this particular stock.
I don’t own DGE today and, on balance, I would not buy at the current Diageo share price. I think there are much cheaper bargains lurking in the FTSE 100 for old-school value investors like me. That said, I do expect DGE to find new peaks, but at a much slower pace than of late. Indeed, as the old stock-market saying regarding mega-cap companies goes, “Elephants don’t gallop”!
