Diageo: Long-Term Compounder Down 23% From Peak

(Preview) Company Update (DGE LN) (Buy)

Summary

• Diageo stock has now fallen by 23.0% in USD from its peak in early January, and trades at a 26.9x P/E and 2.1% Dividend Yield.

• Structural growth in global spirits is continuing. Diageo now targets a sales CAGR of 5-7% and an EBIT CAGR of 6-9% in FY23-25.

• Sales were 21% higher organically than before COVID-19 in H2 CY21. Q1 CY22 peer results show sector momentum is continuing.

• Earnings should be resilient against recessions and inflation, as demonstrated in the Global Financial Crisis.

• With shares at 3,537.5p, we expect an exit price of 5,306p and a total return of 57% (16.6% annualized) by June 2025. Buy.

Introduction

We review our investment case on Diageo PLC (NYSE:DEO) following a significant correction in its shares.

The price of Diageo’s American Deposit Receipts (“ADRs”) has fallen by 23.0% (in USD) since their peak in early January (while the price of Diageo shares in London has fallen by 13.9% in GBP).

Diageo shares are now trading at 26.9x CY21 EPS and offer a 2.1% Dividend Yi…