Is the Diageo share price becoming too cheap to ignore?

I generally don’t like to buy stocks that are in downtrends. You just never know when the trend is going to end. Yet recently, the Diageo (LSE: DGE) share price – which has been falling for almost three years now – has caught my eye. Today, the stock’s valuation and the dividend yield look quite attractive and it’s becoming hard for me to ignore it.

A long-term investment

I already own some Diageo shares in my portfolio. I first invested in the alcoholic beverages company all the way back in 2017.

It’s fair to say that owning the stock has been a roller-coaster ride. At one stage, my initial investment was up about 100%.

Now, however, those profits have been wiped out. And given that I added to my holdings a few times between 2019 and 2023 at higher prices, I’m sitting on losses overall.

The stock looks tempting now

Recently, I’ve been holding off on buying more because I didn’t like the downtrend the stock was locked in. One thing I’ve learnt over the years is that trends can last much longer than expected.

But when the stock fell to near 1,825p last week, I started to get really interested.

At that price, the forward-looking price-to-earnings (P/E) ratio was under 15. Meanwhile, the dividend yield was about 4%.

Those numbers strike me as attractive for a company of Diageo’s ilk. This is a company that owns many world-class brands – including Johnnie Walker, Tanqueray, Don Julio, and Guinness – and has historically been a very reliable performer.

Zooming in on the yield, that looks really compelling to me. At 4%, it is higher than most UK savings accounts are paying these days.

A few challenges

Now, it’s no secret that the company is facing a few challenges at present (the share price trend tells us that).

Younger generations are drinking much less than previous generations did at the same age. And GLP-1 weight-loss drugs are reducing demand for alcohol.

There’s also talk of adding more health warnings to alcohol packaging. Tariffs are another complication.

Put all this together and the long-term growth story doesn’t look as attractive as it once did.

Alcohol isn’t going away

But I don’t think people are going to stop drinking completely any time soon. Across the world, people are likely to continue consuming alcohol at restaurants, bars, pubs, airport lounges, concerts, festivals, and sports events for the foreseeable future.

And here’s the thing – if interest rates continue to come down, alcohol demand could potentially get a boost. Lower rates could lead to more disposable income for consumers and result in higher sales for Diageo and its peers.

Lower interest rates could also lead to more focus on dividend stocks. And Diageo – which has increased its payout every year for over 20 years now – could benefit.

My move now

So, will I buy more Diageo shares for my portfolio in the near future? I think so.

They’ve moved off their 52-week lows in recent days. But if they fall back to near 1,800p, I’ll be looking to add to my position.

The post Is the Diageo share price becoming too cheap to ignore? appeared first on The Motley Fool UK.

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