The Diageo (LSE: DGE) share price has had a rough 2023 and is down almost 25% over 12 months. Personally, I couldn’t be happier. Why? Because I’ve been wanting to buy the spirits giant for ages, but didn’t have the cash.
Then it crashed and I did have the cash so got it at a whopping 25% discount. Which looks like a brilliant piece of business for what I still think is one of the best buy-and-hold stocks on the FTSE 100.
I took my chance
Diageo is a huge, globally diversified business, selling more than 200 brands in nearly 180 countries. Old favourites such as Johnnie Walker, Smirnoff, Guinness, and Tanqueray are only the start.
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The joy of diversification is that when one region struggles, another will often compensate. The downside is that struggles in one sector can hit overall group performance. Diageo was hit by falling sales in Latin America and the Caribbean, one of its five key regions which accounts for 11% of net sales. Sales are set to fall by more than 20% in the second half of the year, forcing Diageo to issue a profit warning.
Result: the biggest one-day Diageo share price dip ever, down more than 12% from 3,245p to 2,850p on 9 November.
Sales fell as “macroeconomic pressures in the region are resulting in lower consumption and consumer downtrading”. Diageo’s move to position itself in the premium drinks market has been a success, but it’s an issue when drinkers are feeling poorer. With the US on the brink of recession, Diageo could face more trading down in its biggest market of all.
I like buying good companies on bad news, and that’s what we have here. I’m not expecting an immediate recovery, I think the first half of next year is likely to be bumpy all round. Broker Citi has said that despite the stock drop “it is tough to see a catalyst for the shares”. Even Diageo CEO Debra Crew cannot say when it will resolve its Latin America issues.
Playing the long game
That’s fine by me. I didn’t buy Diageo shares in the hope of banking a quick profit, but to benefit as it claws back lost ground over time. This is the big advantage private investors have over professionals. We can afford to bide our time and take a longer-term view.
Nick Train also plays the long game and he has just doubled down on his stake in Diageo by purchasing more stock for his £1.8bn Finsbury Growth & Income Trust.
Train reckons Diageo looks cheap trading at 17.55 times earnings and should deliver “steady growth” over the next decade, as it’s been doing for years. He says volatility is an “unavoidable” part of doing business in Latin America, but the long-term rewards are worth it as the locals “love Diageo’s products, particularly whisky”.
I do have one long-term concern. The younger generation seems to be drinking less and Diageo could find itself at the sharp end of a huge cultural shift. I think the risk is outweighed by the potential rewards, while today’s bargain entry price offers a cushion against further disappointment. When I get a bit more cash, I’ll double down on Diageo too.
