Diageo's performance in 2023 had its ups and downs, making it a bit of a rollercoaster ride for investors. Despite this, with its strong track record in dividends, I'm taking a closer look to see if it's a stock worth considering.
2023 was a bit of a mixed bag for the stock market, with many companies, including those in the FTSE 100, struggling to deliver significant returns. Diageo (LSE: DGE) was no exception, with its share price taking a 23% hit over the year. Zooming out to a five-year view, the picture isn't much better, with shares down 2%. So why am I eyeing this stock? Let's dig deeper.
Diageo may not be a household name, but it's the force behind some of the biggest brands in the alcoholic beverage industry, like Johnnie Walker, Smirnoff, Guinness, Captain Morgan, and Baileys. Having this suite of brands gives the company immense pricing power, with consistently high demand and minimal competition. Plus, alcohol isn't subject to the same cyclical market trends as other industries, meaning people tend to keep enjoying a drink no matter what's happening in the economy.
With such strong demand, Diageo has been able to deliver impressive revenue figures, pulling in nearly $24 billion last year, with a net income of $3.8 billion. What's more, the company has been rewarding shareholders for 36 years straight. While past performance isn't a guarantee of future success, stats like these are certainly attractive to investors like me.
That said, the current dividend yield sits at 2.8%, below the market average, and the valuation seems a tad high, with a price-to-earnings ratio of 17, compared to the FTSE 100 average of 14.
Looking ahead, there are some risks on the horizon, particularly in certain international markets. The company highlighted a "materially weaker performance outlook in Latin America and the Caribbean" in its November trading update, which could put a dent in profits. Additionally, with global markets grappling with high inflation rates, the outlook remains uncertain. However, with its strong portfolio of brands, I don't see this as a major concern.
To navigate these challenges, Diageo has set up a "breakthrough innovation team" to drive advancements beyond product development. These teams are a smart way to explore new markets and expand offerings, especially in uncertain times like these.
All things considered, I'm bullish on Diageo's prospects. With the stock taking a 23% hit last year, now could be a prime opportunity to buy for long-term growth. If I had some extra cash lying around, I'd definitely be adding it to my portfolio today.
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