Should I buy Diageo shares after their recent fall?

Diageo (LSE: DGE) shares are usually quite stable. But last week, they took a big hit. Is this a buying opportunity for long term investors like me? Let’s have a look.

Why is Diageo’s share price falling

Last week’s drop in share prices can be attributed to Diageo’s interim results, which were posted last Thursday. But the results were not terrible.

For the six months to 31 December, it reported net sales up 18% year-on-year to £9.4bn, thanks to strong organic net sales growth (+9.4%) and the favorable impact of foreign exchange.

Meanwhile, pre-estimated earnings per share rose 15.2% to 98.6p. On the back of this performance, the dividend was increased by 5% to 30.83p per share.

However, there are some problems that cause investors. One of the slower growth in North America (which will account for half of the company’s operating profit in 2022, according to RBC). Here, organic sales grew by just 3% year-on-year versus 14% a year earlier.

Another problem is higher interest payments. For the half-year, Diageo’s net finance costs rose to £292m from £180m a year earlier.

Well positioned for future growth

Looking at the H1 results, I don’t see anything that worries me too much.

The slowdown in North America is not surprising, in my mind. Back in the second half of 2021, consumers cashed in on stimulus checks and spent much of their spending focused on goods rather than experiences. So the H1 comparison will definitely be difficult.

Meanwhile, a 5% increase in dividends (as well as share buybacks announced by the company) shows that management is not concerned about increasing interest payments.

It is worth noting that management is confident that the company can provide medium-term guidance.

We believe we are well positioned to deliver medium-term guidance of consistent organic net sales growth in the range of 5% to 7% and sustainable organic operating profit growth in the range of 6% to 9% for fiscal 23 to fiscal 25.

Diageo CEO Ivan Menezes

Buying opportunity

So I tend to see the recent pullback as a buying opportunity. It is a quality company with a strong brand, high profit levels, and an excellent record of dividend growth (Diageo has registered more than 20 consecutive years of dividend growth).

And the company looks set to benefit from a number of strong trends in the coming year, including the global ‘premiumisation’ trend and rising wealth in emerging markets.

With the share price currently below 3,500p, the expected price-to-earnings (P/E) ratio is now close to 20, which I think is reasonable.

Of course, there are risks to consider here. Trading conditions may be challenging in the short term, due to consumer weakness. And if interest rates continue to rise, profits can be eroded by interest payments.

But all things considered, I like the risk/reward setup here. If I didn’t already have a large position in Diageo, I would buy the shares today.