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Should I buy Diageo shares after their recent pullback?

Diageo (LSE: DGE) shares have had a bit of pullback recently. Only a few months ago, they were trading near 4,000p. Today however, they can be snapped up for around 3,700p.

I own some Diageo shares and they’ve been a great investment for me. Is now a good time to buy more? Let’s discuss.

Are Diageo shares a good investment?

Looking at Diageo today, I think there’s a lot to like about the company from a long-term investment perspective. For starters, the company has an excellent growth track record.

Over the last five years, revenue has climbed from £12.1bn to £15.5bn, which represents annualised growth of over 5%. And looking ahead, management is aiming to generate organic net sales growth of 5-7% between FY2023 and FY2025.

At the same time, Diageo is a relatively defensive company. In a recession, people tend to keep drinking alcohol (although they may downgrade in terms of brands). I like this mix of growth and defence.

Secondly, its brands provide a strong competitive advantage. Brands such as Johnnie Walker, Tanqueray, and Bailey’s are well known all over the world and keep consumers coming back for more. They also help the company generate a high level of profitability. This gives Diageo the firepower to reinvest for the future so it can continue growing.

Finally, Diageo has a dividend yield of over 2% and a long history of dividend increases. It’s also buying back its own shares – another form of returns to shareholders. Buybacks should boost earnings per share, over time.

Is there any value on offer?

The big question however, is whether Diageo shares offer any value at the current price?

At present, analysts expect the company to generate earnings per share of 173p for the year ending 30 June 2023. This means the forward-looking price-to-earnings (P/E) ratio here is about 21.

Now that’s no bargain valuation. But I also don’t think it’s particularly expensive for a company of Diageo’s quality. Given the mix of growth and defence, the competitive advantage, and the capital allocation policy, I think that valuation is fair.

Of course, the valuation does add some risk. If Diageo’s revenue growth slows, or its profits are hit by higher costs, the stock could experience some weakness.

Yet I’d be comfortable buying the stock at that multiple. As billionaire investor Warren Buffett says: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

I’ll point out that Diageo might not be the first stock I’d buy today. I already have a substantial holding here. Meanwhile, I’m seeing a lot of value on offer in other areas of the market.

However, if the stock stays at this price, there’s a decent chance that I’ll buy more shares for my portfolio in the near future.

The post Should I buy Diageo shares after their recent pullback? appeared first on The Motley Fool UK.

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Edward Sheldon has positions in Diageo. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022