The Diageo share price: here’s why I’m buying

The Diageo (LSE: DGE) share price might not be the first FTSE 100 stock investors look to when seeking undervalued investments. However, the company has plenty of attractive qualities that could make it the perfect addition to any portfolio.

Diageo share price qualities

Diageo is one of the world’s largest alcoholic drinks companies. The group owns a range of multi-billion dollar brands that have millions of consumers around the globe. Brands that feature in the company’s portfolio include Guinness and Johnnie Walker, which have almost cult-like followings. 

These unique brands give the corporation a definite competitive advantage over the competition. Consumers are willing to pay £100s for a bottle of the company’s most sought-after spirits. There are a few other businesses that command this kind of customer loyalty, especially at that price bracket. 

Like most businesses, Diageo hasn’t been able to escape the coronavirus crisis unscathed. The company expects to miss its profit target for the year, due to lower alcohol sales to bars and restaurants. Still, the quality of the firm’s brand portfolio should help the Diageo share price rebound quickly when the economy recovers.

Sales of luxury items, such as Diageo’s high-value spirits, have also held up relatively well in a crisis, which bodes well for future growth. And the fact Diageo can charge whatever it wants for its products shows in its profit margins.

Last year, the group reported an operating profit margin of nearly 33%. By comparison, the average profit margin of all the firms listed on the London Stock Exchange is below 10%. That suggests the business is nearly three times more profitable than the average company. 

With this being the case, it’s no surprise owners of the Diageo share price have been well rewarded over the past decade. Shares in the company have yielded a total annual return of 12% over the past 10 years, double the performance of the FTSE 100 over the same time frame. 

A price worth paying

Unfortunately, investor sentiment towards the Diageo share price is hugely positive. Therefore, the stock commands quite a high valuation. At the current price, it’s changing hands at a forward price-to-earnings (P/E) multiple of 23.5, compared to the market average of 14. 

However, because the company is three times more profitable than the average FTSE 100 business, this may be a price worth paying for such a high-quality enterprise. The stock also supports a dividend yield of 2.5%. That’s below the market average, but extremely attractive in the current interest rate environment. 

Therefore, long-term investors may benefit from buying a share of this high-quality growth business today. The Diageo share price might look expensive at current levels, but the company’s stock, like its top of the range spirits, might be worth paying a premium for.