If I’d invested £1,000 in Diageo shares 10 years ago, here’s how much I’d have now

Over the last decade, the Diageo (LSE:DGE) share price has nearly doubled. But there is more to Diageo shares as an investment.

The company also pays out a significant amount of its earnings to shareholders as dividends. So, how much is a £1,000 investment 10 years ago worth today?

return on investment

In January 2013, an investment of £1,000 in Diageo shares would buy 54 shares. Since then, the company has paid out £6.29 per share in dividends to shareholders.

By reinvesting dividends down the road, I will be able to increase my number of shares to 69. At current prices, that means my investment has a market value of £2,533.

This yields £1,533, which is less than 10% per year. I think the return is very good and I would be happy with any investment.

As an investor, the question for me is whether the stock can continue its impressive performance. A look at the underlying business leads me to think that this is reliable.

earnings

The first thing I noticed was that my company’s stock price was rising faster than its earnings. Diageo shares have risen from £18.43 per share in 2013 to £36.71 today.

That’s an average gain of just over 7% per year. In contrast, the company’s earnings per share have increased from 97p to £1.40 – an increase of just 3.75% year-on-year.

That means a significant part of Diageo’s share price is not due to its growing business. This is the result of investors willing to pay higher prices.

I don’t see this as unreasonable investor behavior. In the last decade, interest rates in the UK have been low, justifying higher share prices.

But now, interest rates are rising rapidly. And I think this means that investors are not willing to pay high prices for shares in companies like Diageo.

Stocks to buy?

Diageo’s brand profile is stellar. These are among the best-selling gins (Gordon’s), the best-selling vodka (Smirnoff), and the best-selling Scotch whiskey (Johnny Walker).

I think this means that the company will generate cash for its shareholders consistently for years to come. And that can be valuable in a recession.

I also agree with Warren Buffett that it is better to buy strong companies at a decent price than other ways. But Diageo is not a stock I would like to buy right now.

The company’s earnings haven’t kept pace with its stock price over the last decade and have caused the stock to rise slightly today. That’s why I think there are better opportunities elsewhere.