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Diageo (LSE: DGE) shares continue to suffer the mother of all hangovers. The FTSE 100 spirits giant has given investors a major headache, and I know, because I’m one of them.
Diageo promised me a real party. It nibbled away at my inhibitions, until I couldn’t resist adding it to my portfolio.
Every seasoned investor knows the feeling. And averaging down on the stock – the investment equivalent of a hair of the dog – didn’t help.
Over the past year, the Diageo share price has dropped 25%. Over two years, it’s fallen 40%. And the bad news keeps coming.
In the past month, Diageo shares tumbled more than 12%. That drop alone would have turned a £10,000 investment into just £8,800. A painful paper loss of £1,200. On the FTSE 100, only Glencore has fared worse over the past month.
This FTSE 100 stock needs a pick-me-up
What’s behind the latest slip? The prime factor seems to be the company’s decision on 4 February to withdraw its medium-term guidance. Management blamed Donald Trump’s tariffs on Mexican and Canadian imports, which could seriously impact Diageo’s tequila and Canadian whisky brands. Cynics suggested Trump was a handy excuse.
In its latest results, Diageo reported that net sales had slipped 0.6% to $10.9bn, while operating profit slipped 4.9% to $3.16bn.
Foreign exchange movements didn’t help. Nor did a 132-basis point decline in operating margins to 30.3%.
With all this uncertainty, it’s no surprise the stock recently slumped to a fresh 52-week low. While this may have tempted bargain seekers before, for many it’s now a case of once bitten, twice shy.
Diageo now trades on a price-to-earnings ratio of exactly 16. That’s the lowest valuation I can remember. That doesn’t mean it can’t fall lower though.
On top of that, the dividend yield now stands at 3.7%. That’s also as high as I can remember.
I’ll hold but I’m not happy
There are some silver linings. Operating margins are forecast to rise from 21.5% to 28.1%. And with a return on capital employed (ROCE) of 30.7%, this is still a fundamentally strong business. The real question is whether the worst is over or if there’s more pain to come. So what do the experts say?
The 21 analysts offering one-year share price forecasts have produced a median target of 2,579.5p. If correct, that’s an increase of around 18.5% from today.
Combined with the dividend yield, that would give me a total return of more than 22%. I’d raise a glass to that.
However, within that target figure, there’s a broad range of expectations, from a high of 3,062p to a low of 1,980p. Which confirms my view that this stock could go either way.
Honestly, I never expected Diageo to take such a beating. I thought alcohol was forever. That may not be the case, as younger generations find their kicks in other ways. Like being healthy.
At least Guinness is giving Diageo strength. I’ll need some of that as I wait for this hangover to clear. While quietly groaning to myself “Never again…”
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