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Should I buy shares in FTSE 100 alcohol stock Diageo (LSE:DGE)?

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·3-min read
Shelves holding drinks bottles
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FTSE 100 stock Diageo (LSE:DGE) is doing well, and with the reopening under way, this seems set to continue. When Covid-19 struck, wholesale alcohol sales took a hit, but home consumption compensated. Ready-to-drink cocktails have been proving popular, and Diageo is expanding its offerings here.

The Diageo share price climbed between March and June last year but had lost most of its gains by October. Since then, it has rebounded 39%.

Potential takeover target?

Back in 2015, an article about a possible bid sent Diageo’s share price soaring. The potential bidder was 3G Capital Partners, in which billionaire investor Warren Buffett has a stake. Nothing was ever confirmed, and Diageo called it “market speculation and rumour”.

3G Capital Partners had missed out on acquiring Unilever for $143bn in 2017. So, could it potentially look in Diageo’s direction again?

The amalgamation of big brands is becoming a popular way to build a powerhouse. And private equity is getting in on the action. 3G Capital already acquired Kraft Heinz and Restaurant Brands International. Plus, it has significant stakes in Singaporean internet company Sea, and online used car retailer Carvana, among others.

I think Diageo is is n attractive target as it’s a force to be reckoned with. It’s grown considerably since 2015. But at £80bn, its market cap is lower than Unilever’s. I wouldn’t rule it out as a takeover target.

Loyalty pays off

But I’m a long-term investor and I think DGE scores here too. Loyal shareholders who’ve stuck with Diageo over the past seven years enjoyed a rising dividend and benefited from share buybacks. The pandemic put a temporary halt to the dividend. And today Diageo shares are still slightly below their 2019 high. But I think it has scope for climbing further as the hospitality sector reopens.

In its May update, the company said it expects organic operating profit growth to reach at least 14% this year, beating analyst expectations. This led it to resume its return-of-capital scheme, which should deliver £1bn in shareholder payments by the end of next year, including £500m in share buybacks before November 2021.

Sustainability focus

Some 80% of Diageo’s carbon footprint comes from heat, mainly through its brewing and distilling operations. To offset this, it’s been making sustainability moves. These include planting trees to restore landscapes and a paper bottle launch later this year.

It’s also integrating sustainability, inclusion and positive drinking messages into each of its brands. I think this goes a long way to building consumer loyalty and longevity in brand awareness. For instance, linking Guinness with women’s rugby, and Smirnoff with PRIDE.

Risks to shareholders

While I like the look of Diageo’s future, shareholder risks remain. Inflation or a trade war would impact sales, the travel sector is an important money-spinner for the company and has not yet resumed full capacity. Plus, a focus on health could deter consumers from drinking alcohol. I think this unlikely, but it’s still a risk.

But as a global operation servicing multiple sectors, it has a significant advantage. Diageo is at the forefront of the growth of ready-made drinks which is also driving the sector today. Its outlook is positive, the share buyback is a plus and its track record is excellent. I’d add Diageo shares to my Stocks and Shares ISA.

The post Should I buy shares in FTSE 100 alcohol stock Diageo (LSE:DGE)? appeared first on The Motley Fool UK.

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Kirsteen has no position in any of the shares mentioned. 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 2021

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