Berkshire Hathaway acquires minor stake in Diageo amid company's growth plans

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Berkshire Hathaway acquires minor stake in Diageo amid company's growth plans
Credit: © Reuters.

Berkshire Hathaway (NYSE: BRKa ) recently disclosed a 0.04% stake in UK-based alcohol company Diageo (LON: DGE ), known for its popular brands like Guinness and Smirnoff.

Diageo has been focusing on growing its total beverage alcohol (TBA) market share from the current 4.7% to 6% by 2030. The company's net sales saw an 11% growth from fiscal year 2022 to 2023, surpassing competitors. Committed to providing shareholder returns, Diageo has consistently raised its semi-annual dividend, which currently yields about 2.6%, with a safe payout ratio of 47%. The company has also announced a $1 billion share repurchase program due by the end of fiscal year 2024.

However, the company's ambitious acquisition strategy, including recent purchases of Don Papa Rum, Mr. Black, and Balcones Distilling, has led to an increase in net debt to $18.8 billion, marking a rise of 42% over the past five years. This increase poses challenges in a high-interest rate environment and could potentially affect future acquisitions and dividend growth.

Despite underperforming the S&P 500 over the past five years, Diageo's stock appears undervalued with a price-to-earnings (P/E) ratio of 19, which is below its five-year average and lower than its competitors. With Berkshire Hathaway's minor stake and management's focus on shareholder returns, patient investors may see potential rewards in the future.

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