With Diageo’s share price down 25%, is this now an opportunity not to be missed?

DiageoThe company’s share price (LSE:DGE) has fallen 25% since its November 9 high of £32.68 in the past 12 months.

However, the starting point for me when assessing whether a stock could be a bargain is the price-to-earnings (P/E) ratio.

In this case, the world’s largest spirits producer’s shares are valued at 18.6, while its competitors’ average price/earnings is 19.9.

These include: Remy Cointreau at 17.4, Constellation Brands at 18.6, Pernod Ricard at 21.3 and Brown-Forman at 22.2.

So Diageo is being frugal in that respect.

The same applies to the key price-to-book value (P/B) ratio, which is 3.6, while the average for companies in the same industry is 3.8.

To determine how much of a bargain this is in cash terms, I ran a discounted cash flow analysis. Using data from other analysts and my own, it shows that the shares are undervalued by 49% at the current share price of £24.67.

This means the fair value of the shares would be £48.37, although this could be lower or higher.

What is the dividend yield?

In its 2024 results, Diageo raised its total dividend by 5% to 103.48 cents (79p) per share. This gives a current yield of 3.2%.

Analysts forecast payouts will rise to 80.8p in 2025, 84.7p in 2026 and 89.7p in 2027.

This would generate a rate of return on the current share price of 3.3%, 3.4% and 3.6%, respectively.

Current FTSE100 the average efficiency is 3.6% and FTSE250It amounts to 3.3%.

What are the development prospects?

Ultimately, any company’s stock price (and dividend) depends on earnings growth.

Analysts expect Diageo’s profits to grow by 1.5% annually through the end of 2027. That’s better than no growth, but it underscores management’s uncertainty about near-term earnings growth drivers.

On November 10, the company issued a profit warning due to weak demand in the Latin America and Caribbean region.

Previously no attention had been paid to this at all, and this fact has played a key role in the enormous drop in prices since then.

The 2024 results, released July 30, also showed a 3% year-over-year decline in Diageo’s organic net sales in North America. The region accounts for 40% of global sales.

The company attributed the decline to the weak consumer environment, and I believe this remains a major risk for the company.

Worse, from my perspective, the results gave no indication of when these benign conditions might end. Earlier, on a Jan. 30 conference call, CEO Debra Crew indicated that it could take six to 18 months to turn things around.

Are shares a unique opportunity for me?

Technically, Diageo is a great opportunity, which is a positive for me. Another is that it pays a reasonable dividend, which is expected to grow.

But now I’m at a point in my investment cycle where I’m focusing on high-yielding stocks. The idea is that they will generate enough dividends that I can further reduce my work commitments and live off them.

Therefore, at my stage of life, it is not something I can’t miss.

Even if I were 10 years younger, I would want to see a clear growth strategy developed by management before I would consider buying a company.