Diageo: Post-COVID Reopening Play With 2.7% Dividend Yield

Seeking AlphaDividend Ideas | United KingdomDiageo: Post-COVID Reopening Play With 2.7% Dividend YieldSep. 21, 2020 8:51 AM ET|| About: Diageo plc (DEO), DGEAF, Includes: BF-A, BF-B, PDRDF, PDRDY, REMYF, REMYYby: Librarian CapitalLibrarian Capital Hedge Fund Analyst, Long/Short EquitySummaryDiageo shares have lost 22% since last July when we initiated a Buy rating, due to COVID-19’s effects on “on premise” consumption.
H2 FY20 results (January-June) showed the full impact of the lockdown, with sales down 23% and EBIT down 42% year-on-year organically.
The final dividend was maintained (implying a 2.7% total Dividend Yield), and management comments support continuing payments.
Diageo's earnings growth has been healthy up to H1 FY20, and the long-term structural growth story in the global Spirits sector has not changed.
At 2,568.5p, shares can deliver an annualised return of 12.1% and a total return of 53% in the next 3.5 years. We reiterate our Buy rating.
Introduction
We re-examine our investment case on Diageo (DEO), with shares down another 10% since our last review in June, and review FY20 results released last month.
Since our initial Buy rating in July 2019, the U.K.-listed Diageo shares have lost 22.0% (after 112.4p in dividends), underperforming the FTSE All-Share. Diageo has also materially underperformed global Spirits peers including Pernod Ricard (Buy-rated) (OTCPK: PDRDF) (down 10% in local currency), Rémy Cointreau (Buy-rated) (OTCPK: REMYF) (up 22%) and Brown-Forman (not covered) (BF-B) (up 27%):
Diageo Share Prices vs. FTSE All-Share (Since 10-Jul-19)

Source: Yahoo Finance (18-Sep-20).

Buy Case Recap
Our original Buy case last July predicted a 8-10% annualised return for investors, based on the following:
Diageo benefits from the structural growth in the global spirits industry, including premiumization and rising emerging markets consumption Diageo also enjoys competitive advantages from its... Read more