3 things that put me off Diageo shares

At the start of this year, I did something I never thought I would do just a year earlier. I sold my long-held Diageo (LSE:DGE) shares.

I offloaded these for £24 each. In hindsight, that seems like a good move because they’re now changing hands for just over £18 (around 25% lower).

But I’m not in any rush to buy them back at the lower price. Here are three things that continue to put me off the FTSE 100 drinks giant.

Changing times

The main worry I have is that alcohol consumption is in structural decline across most of the West. And while it’s true that Gen Z has not sworn off alcohol entirely, they are drinking less overall.

There appear to be two key reasons for this. One is cost. My granddad could go out as a young man and drink a few pints, then eat fish and chips on the way home, all for a pocketful of change.

Not so today. Young people just cannot afford to go out drinking two or three times a week, like previous generations regularly did.

The second reason is health. According to McKinsey, wellness among millennials and Gen Zers has “become a daily, personalised practice rather than a set of occasional activities or purchases”.

Its latest Future of Wellness survey says these generations are increasingly putting wellness at the centre of their lifestyle choices — health, sleep, nutrition, fitness, appearance, and mindfulness. Alcohol and smoking don’t fit in.

In other words, younger generations both can’t drink a lot (cost) or don’t want to (health). I don’t see either of these things reversing.

Low growth

Now, I should state that I obviously expect alcohol consumption to be around for many more decades, probabaly forever. After all, humans have willingly been consuming booze in form or another since the Stone Age.

But I fear it’s just not a global growth market anymore. Like smoking, any developing market growth could be offset by shrinking volumes in the West.

Diageo is forecast to produce low levels of growth — if any — over the next couple of years.

Not like tobacco

I do see similarities between Diageo and British American Tobacco. They’re both global giants in their industries, with strong margins and powerful portfolios of brands. My favourite pint is probably a Guinness and my go-to gin is Tanqueray (both Diageo brands).

British American Tobacco has been able to milk a shrinking market for decades, underpinning strong dividend growth.

Might Diageo do the same? And if so, wouldn’t this make the starting dividend yield of 4.2% look very attractive? Potentially. But I do see some key differences.

Cigarettes are much more chemically addictive. Demand shrinks mostly because of regulation, taxation, and social stigma, but existing users often stay hooked for decades. So there’s a level of built-in pricing power. 

In contrast, most alcohol consumers are social or moderate drinkers. That means they can (and do) cut back more easily when health, cost, or cultural shifts push them to. Most smokers light up alone, while drinking is still largely a social act (alcoholism aside).

I may be totally wrong about all this, and I’m confident Diageo will rebound strongly if I am. But these are the reasons why I’m not keen to rebuy Diageo shares.

The post 3 things that put me off Diageo shares appeared first on The Motley Fool UK.

More reading

• Here’s the dividend forecast for Diageo shares through to 2028
• Could Diageo shares be the ultimate value trap?
• Are Diageo shares turning into the next British American Tobacco?
• Diageo shares continue to slide as financial and health concerns deter consumers. Where to from here?
• The State Pension triple lock may be at risk. Are dividend growth shares the solution for retirees?

Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. and Diageo Plc. 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.

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