Down 25%! Is it time to give up on this failing FTSE 100 share?
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Gaining a spot on the FTSE 100 is a difficult task. The businesses that make it onto this prestigious index are typically well-established and not likely to go under.
The majority of my investment portfolio includes businesses listed in the stock market index - stable companies that offer steady growth and consistent dividends. Unlike risky small companies, these stocks don't require constant monitoring from me. I rarely need to keep tabs on them, trusting that they will continue to provide stable returns and growth over time.
But, there is a single stock in my portfolio that is decreasing my overall profits. I have been hopeful about it for quite some time, but my optimism is fading. With losses of nearly 25% in the last year, I am starting to think it may be time to accept that I have been unsuccessful.
Let's think about its potential.
If you had asked me two years ago about my top three favorite stocks, Diageo (LSE: DGE), the company that makes Smirnoff and Guinness, would have been one of them. However, since August 2022, the stock has been steadily dropping in value, losing more than 30% of its worth.
Even with a 3% dividend yield, it doesn't do much to ease the pain from these losses.
Many of these issues stem from decreasing sales in Latin America and the Caribbean (LAC), where the long-lasting impacts of Covid-19 have negatively affected the economy. Consumers who are feeling the strain on their wallets have been choosing cheaper options instead of the usual popular brands. However, now that inflation is on the decline and the economy is starting to improve, I anticipate a rebound in sales for this year.
In the most recent financial report released in July, there was a decrease in sales for the first time in over a year. Even though there was an 8.2% increase in operating profit according to the report, the company's stock price dropped by 10% on that day. The situation has become severe enough that financial experts are now considering the possibility of Diageo being acquired by another company.
Even though there was a decrease, it still holds a majority share of 75% in sales in markets that have been measured, and there is growth in most areas. The majority of losses are in the LAC region, but a slight improvement there could change the situation. It is predicted that earnings will keep declining until the middle of 2025, but they are expected to start recovering by 2026.
Diageo is a major player on the FTSE 100, ranking as the tenth-largest company. This comes as no shock due to the company's dominance in the global alcohol industry. Diageo boasts an extensive lineup of well-known brands such as Johnnie Walker, J&B, Seagram, Don Julio, Tanqueray, and Bell's. It's nearly impossible to go a day without encountering one of their products on store shelves.
A major rival company of this brand is Brown-Forman, a large American company that produces Jack Daniel's Whiskey and Herradura tequila. Unfortunately, they have faced a 35% decrease in sales this year. Pernod Ricard, a well-known French company, has also experienced a similar fate with a 32% decline in sales.
This indicates that alcohol consumption is decreasing worldwide. Research has shown a shift in the drinking patterns of younger people, who are favoring low-alcohol and non-alcoholic options more frequently.
Why do I have a sense of déjà vu?
It's been nearly 20 years since cigarettes went out of style and vapes became popular. However, British American Tobacco has been able to thrive during this time. Through collaboration with regulators and staying flexible with the evolving market, the company has managed to withstand the changes.
I hope Diageo pays attention, and quickly. If not, I might have to go against my own rule and sell the shares at a lower price.
The article titled "Down 25%! Should we consider abandoning this struggling FTSE 100 stock?" was published on The Motley Fool UK.
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Mark Hartley owns shares in British American Tobacco and Diageo. The Motley Fool UK has suggested investing in these companies. The views expressed in this article are the writer's own and may not align with our official recommendations in our subscription services. At The Motley Fool, we value taking in a variety of perspectives to become more informed investors.
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