One of the best FTSE 100 dividend shares is trading at a 52-week low. As a result of an impending lawsuit, Diageo (LSE:DGE) shares have fallen by around 8% over the last month.
Investing during a scandal allowed Warren Buffett to make a $1.3bn investment in American Express that now returns $300m per year in dividends. So is there a similar opportunity in Diage shares?
Investing like Warren Buffett
There are two reasons Buffett’s investment in American Express has worked so well. One, it’s a strong business, and two, a lawsuit that was looming at the time allowed the Berkshire Hathaway CEO to invest at a bargain price.
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So is the same thing true of Diageo shares? It’s clear the company is a strong business – the firm’s brand portfolio and huge scale give it an almost unassailable advantage over competitors.
As a result, Diageo manages to maintain operating margins in the 20%-30% range. That’s comfortably higher than Unilever and on a par with Coca-Cola – a stock Buffett routinely praises.
The company’s strengths are well-known and the share price is nearly never cheap as a result. So why is the stock trading at its lowest levels for a year?
Why is the share price falling?
Diageo shares have been falling due to news that rapper Sean Combs is suing the company. The filing is related to joint ventures between Combs and Diageo.
According to Combs, Diageo has been unfairly marginalising their joint ventures. Specifically, it alleges that Diageo has been limiting distribution to Black neighbourhoods.
The lawsuit amounts to an accusation of racism. Exactly how it will resolve is unclear, but the uncertainty has been weighing on the Diageo share price.
A once-in-a-lifetime opportunity?
So is there a once-in-a-lifetime opportunity in Diageo shares? There’s no doubt the stock is more attractive at today’s prices than it was a month ago, but I’m not convinced.
Despite the recent decline, the stock isn’t obviously cheap. Diageo shares still trade at a price-to-earninga (P/E) ratio of around 21, with a 2.3% dividend yield.
That’s lower than Coca-Cola, which trades at a 27 P/E multiple (albeit with a 3% dividend yield). But Diageo’s growth prospects are arguably worse.
Earlier this year, the company reported slowing sales growth in the US. And it stated it expects this to persist throughout 2023.
In my view, that makes the current share price look high. It’s cheaper than it was, but it doesn’t look like an obvious bargain to me.
Buying Diageo shares
I’m not convinced there’s a once-in-a-lifetime opportunity in Diageo shares at the moment. Despite the uncertainty around the lawsuit, the stock still looks fairly priced to me.
That said, I still think the stock is one of the highest-quality dividend shares in the FTSE 100. I’d be looking to buy Diageo shares at around £29, which implies a P/E ratio of around 19.
At that level, I’d see the stock as a bargain. It isn’t there yet, but depending on how the lawsuit develops, it could be on the way.
