Diageo (LSE: DGE) shares are normally pretty stable. Yet last week, they took a big hit. Is this a buying opportunity for long-term investors like myself? Let’s take a look.
Why Diageo’s share price fell
The share price fall last week can be attributed to Diageo’s interim results, which were posted last Thursday. But the results were by no means terrible.
For the six months to 31 December, reported net sales were up 18% year on year to £9.4bn, thanks to strong organic net sales growth (+9.4%) and favourable impacts from foreign exchange.
Meanwhile, pre-exceptional earnings per share were up 15.2% to 98.6p. On the back of this performance, the dividend was increased by 5% to 30.83p per share.
However, there were some issues that spooked investors. One was slower growth in North America (which accounted for around half of the company’s operating profit in 2022, according to RBC). Here, organic sales grew by just 3% year on year versus 14% a year earlier.
Another issue was significantly higher interest payments. For the half year, Diageo’s net finance charge rose to £292m versus £180m a year earlier.
Well-positioned for future growth
Looking at the H1 results, I don’t see anything that worries me too much.
The slowdown in North America is not particularly surprising, to my mind. Back in the second half of 2021, consumers were cashed up from stimulus cheques and a lot of their spending was focused on goods as opposed to experiences. So H1 comparables were always going to be tough.
Meanwhile, the 5% increase in the dividend (as well as share buybacks announced by the company) suggests management is not too concerned about rising interest payments.
It’s worth noting here that management was confident the company can deliver on its medium-term guidance.
We believe we are well-positioned to deliver our medium-term guidance of consistent organic net sales growth in the range of 5% to 7% and sustainable organic operating profit growth in the range of 6% to 9% for fiscal 23 to fiscal 25.
Diageo CEO Ivan Menezes
Buying opportunity
So I’m inclined to view the recent pullback as a buying opportunity. This is a high-quality company with strong brands, a high level of profitability, and an excellent dividend growth track record (Diageo has registered more than 20 years of consecutive dividend growth).
And the company looks set to benefit from a number of powerful trends in the years ahead, including the global ‘premiumisation’ trend and rising wealth in the emerging markets.
With the share price currently under 3,500p, the forward-looking price-to earnings (P/E) ratio is now near 20, which I think is very reasonable.
Of course, there are risks to consider here. Trading conditions may be challenging in the short term, due to consumer weakness. And if interest rates keep rising, profits may be squeezed by interest payments.
All things considered however, I like the risk/reward setup here. If I didn’t already have a large position in Diageo, I would be buying the shares today.
The post Should I buy Diageo shares after their recent fall? appeared first on The Motley Fool UK.
Should you invest £1,000 in Diageo right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Diageo made the list?
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
My top 2 stocks to buy in February
Are Diageo shares the FTSE 100’s best long-term buy?
1 UK stock I’d put 100% of my money into
Earnings: why the Diageo share price is falling today
I’d buy 6 shares a week of this FTSE 100 stock for £100 a month in passive income
Edward Sheldon has positions in Diageo Plc. The Motley Fool UK has recommended Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
