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A £10,000 investment in Diageo (LSE:DGE) made 12 months ago would have a market value of £7,340 today. That’s probably not the result investors who bought the stock were looking for.
There is however, a more positive way of looking at it. Right now, there’s a chance to buy shares that were trading at £29.85 a year ago for £21.91.
Dividends
When evaluating Diageo, it’s important to account for the dividend – investors who owned the stock for the last 12 months have received 81p per share. That’s £271 on a £10,000 investment. In the context of the stock falling almost 27%, that’s not a lot.
But the company has a very good record of increasing its dividend and a lower share price means a higher yield. While the dividend is important, it shouldn’t be the only thing investors concentrate on. What matters most is the underlying business and how much cash it generates.
Over the long term, this is what determines investment returns – including how much Diageo can distribute in dividends. And things haven’t been going all that well recently.
Diageo’s difficulties
Diageo has been contending with some significant challenges. These include the rise of anti-obesity medication, the threat of US tariffs, and a weak macroeconomic environment.Some of these issues look temporary.
Macroeconomic weakness in places like Latin America and the Caribbean probably shouldn’t change a long-term investor’s view of the stock. Others however, are more durable. GLP-1 drugs are probably here to stay and investors need to think carefully about what the likely impact of these is going to be on Diageo’s business.
Things like US tariffs are a bit harder to judge. Exactly whether and for how long they will be implemented is difficult to assess, but they seem unlikely to be permanent.
Investment analysis
Diageo’s difficulties are real and should be taken seriously, but they all have something in common. They’re all to do with demand in the wider industry, rather than supply challenges. In other words, the company’s competitive advantages are still intact. And investors might think this is the most important thing, whether the issues are temporary or permanent.
All industries go through downturns. But when this happens, the strongest businesses generally tend to do better than their rivals – and I think this is a positive thing for Diageo.
Even if the problems prove to be durable, strong brands should still give the company a chance to grow its market share. So I think there are still good reasons for investors to be optimistic.
Greed or fear?
Billionaire investor Warren Buffett is known for saying that the best returns come from being greedy when others are fearful. But investing isn’t as straightforward as this. Sometimes, the stock market has good reasons for being pessimistic. And piling into a stock without paying attention to the risks isn’t a good idea.
Diageo’s definitely contending with some genuine challenges at the moment, which can’t just be ignored. But with its long-term competitive position intact, I think it’s worth considering.
