I’ve bought more Diageo shares for my retirement portfolio. Am I mad?

I’ve been talking about buying more Diageo (LSE: DGE) shares for a while now and I’ve finally gone and done it. Recently, I added to my holding while the share price was under £16.

Am I mad to invest in this dog of a stock when there are so many other great opportunities in the market? Possibly!

But here’s my rationale for investing more money in the alcoholic beverages powerhouse.

The shares look dirt cheap

Let’s start with the fact that the shares have fallen more than 50% from their highs. That’s a huge decline for a large-cap FTSE 100 company. And I see it as excessive. After this decline, the shares now look cheap. Currently, the forward-looking price-to-earnings (P/E) ratio here is only 13.

That strikes me as an attractive valuation for a company with a whole portfolio of world-class brands. I know this company’s facing some challenges but I’m unconvinced it deserves to trade at a below-market-average earnings multiple.

It’s worth noting that earlier this month, Diageo’s chief commercial officer Dayalan Nayager bought about £460,000 worth of shares. So he obviously sees value too.

As for the dividend yield, it’s jumped to almost 5%, so I could pick up some decent income here. I’m not banking on this income however, as I think there’s a chance the dividend payout may be reduced to free up cash.

The new CEO’s a turnaround specialist

Another reason I’ve invested more money in the company is that it has a new CEO, Dave Lewis (aka ‘Drastic Dave’). A turnaround specialist (he fixed Tesco’s problems), he’s been brought in to radically improve performance.

I think there’s a lot he can do. If I was the CEO of this company, I’d consider:

• Offloading weak/underperforming brands to free up cash and bolster the debt-heavy balance sheet.
• Being far more selective with brand acquisitions (it has bought some duds in recent years).
• Reducing the dividend to free up more cash.
• Pivoting towards more accessible premium products to capture/retain cash-strapped consumers.
• Focusing more on low/non-alcohol spirits to appeal to a wider range of consumers (eg non drinkers and those who are more health conscious).
• Aggressively using AI to streamline marketing activities and reduce costs.

Overall, there’s a ton he can do to improve performance here. I’m hoping we start to see some action in the months ahead.

A turnaround could take time

Of course, Lewis has his work cut out. Right now, Diageo’s facing a toxic combination of less disposable income, US tariffs, changing attitudes towards alcohol, lots of debt on the balance sheet, and negative investor sentiment.

Given all these issues, I’m not expecting the stock to shoot up in the near term. A recovery could be slow.

I’m a patient, long-term investor however. And I see scope for attractive returns in the years ahead given today’s low valuation.

In my view, the shares are worth a look while they’re near £16.

The post I’ve bought more Diageo shares for my retirement portfolio. Am I mad? appeared first on The Motley Fool UK.

More reading

• Prediction: Diageo’s restructuring strategy will send its share price higher
• Building a second income from UK stocks: how much is needed?
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• As Diageo’s share price dives, is this a once-in-a-decade opportunity?

Edward Sheldon has positions in Diageo. The Motley Fool UK has recommended Diageo Plc and Tesco. 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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