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Until a couple of years ago, Diageo (LSE:DGE) shares were an obvious choice for passive income investors. But the company seems to have lost its way.
CEO Debra Crew however, believes the difficulties are temporary. And in a recent interview with Nicolai Tangen, she set out the FTSE 100 firm’s strategy for long-term growth.
Short-term concerns
Diageo has been facing several challenges, but Crew thinks the ones the company can do least about are either cyclical or short-term in nature. A lot comes down to inflation.
Higher living costs have cut into consumer spending. But Crew points out the amount people spend on alcohol as a proportion of their disposable income has been resilient over time.
I think this is encouraging for shareholders. Diageo can’t do much about inflation, but it’s a positive sign that consumer spending on alcohol is likely to recover when it does.
Crew sees the recent tariffs introduced by the US as a similar issue. While they’re a short-term challenge, Diageo operates in 180 countries that have various duties and taxes to be paid.
This means the FTSE 100 firm has a lot of knowledge and experience when it comes to mitigating these issues. And the CEO thinks this will be the case over the long term.
Diageo is clearly facing some short-term issues it can’t control and the risk is these are more durable than Crew believes. But what matters most for investors is the long-term growth plan.
Long-term growth
There’s been a lot of talk about how younger consumers are spending less on alcohol and the difficulty this presents for drinks businesses. This includes the effect of GLP-1 drugs.
The trend towards moderation is real, but – as Crew notes – it’s been going on for over a decade. And the Diageo CEO sees the chance to do more than just offset the declining market.
Spirits are currently gaining popularity over beer and wine, especially around meal times. This is a trend that (mostly) works in Diageo’s favour in terms of its portfolio.
There’s also been major growth in non-alcoholic drinks and ready-to-drink lines. And Diageo has been making use of its scale and brand power to launch products in both categories.
The biggest trend though, is towards premium products. As Crew points out, this makes up around 35% of the wider industry, but 62% of the FTSE 100 firm’s range.
Consumer habits are evolving, but Diageo isn’t standing still. The company has clear ideas about where the industry is headed and is making strategic moves to get ahead of the trend.
Long-term passive income?
It should be no surprise that Crew has a positive view of the company’s prospects. But regardless of the source, her message to investors is clear and – in my view – plausible.
The firm can’t do much about inflation or tariffs, but revolving consumer tastes present long-term opportunities. And Diageo’s competitive advantages are firmly intact.
If this is right, buying the stock today with a 4% dividend yield could be a great passive income investment. I think it’s well worth considering at today’s prices.
