The Diageo (LSE: DGE) share price received a boost at the end of July when the drinks giant reported a 21% increase in sales for the year ended 30 June.
However, as a long-term investor, I’m more interested in price movements over years, not weeks. As a general rule, I only buy shares that I’d be happy to hold for at least five years.
Diageo’s brands include long-term performers such as Tanqueray, Johnnie Walker and Guinness. But the last five years haven’t all been smooth sailing. If I’d bought Diageo shares in August 2017, would my long-term strategy have delivered good results?
Market-beating profits
On 18 August 2017, Diageo shares closed at 2,549p. As I write, they’re trading at 3,890p. That’s a gain of 52.6%.
Diageo has also paid dividends totalling 305p over this five-year period. That’s another 12% gain, based on the August 2017 share price.
These numbers tell me that Diageo shareholders have enjoyed a total return of 64.6% over the last five years. That means an investment of £1,000 would be worth £1,646 today, including dividends.
That’s equivalent to an average total return of 10.5% per year — comfortably ahead of the long-term average return of around 8% from the UK market.
What’s special about this business?
One of Diageo’s key advantages is its portfolio of popular brands. Names such as Baileys, Smirnoff and Guinness attract loyal customers.
At the same time, many drinkers like to trade up to more premium offerings when they’re able to treat themselves. Diageo has a big presence in this sector of the market too, with brands such as Ketel One vodka and Casamigos tequila.
Diageo’s size and long history give it another big advantage over most rivals. The company has a global sales and marketing organisation, backed up by huge distribution reach. Walk into any bar in the world, and there’s a good chance you’ll find Diageo products for sale.
One other attraction, in my view, is strong management. CEO Ivan Menezes has been a steady hand at the wheel since taking charge in 2013. He’s gradually adapted the group’s portfolio to profit from emerging markets growth and the trend for premiumisation.
As a result, Diageo’s operating profit margin has now stayed close to 30% for more than a decade. That’s a rare achievement.
Would I buy Diageo shares now?
The rising cost of living is putting pressure on consumer spending in many parts of the world. One risk for Diageo is that drinkers will trade down to cheaper brands. Spending on corporate hospitality and high-end duty free could also fall during a recession.
However, the company says that it’s confident it can handle these risks. I agree. I think any drop in sales will be temporary, at worst.
I feel the only question I need to answer about Diageo shares is whether they’re too expensive.
My analysis suggests the stock is probably trading at fair value at the moment. On a long-term view, I think buying the shares could be profitable.
However, I prefer to have a bigger margin of safety when I invest. For this reason, my plan is to wait for the next market sell-off before I add Diageo to my portfolio.