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Others FTSE 100 companies have been paying attention to the potential impact of Donald Trump’s proposed tariffs. Another firm that can feel the pinch is the booze behemoth Diageo (LSE: DGE).
Here, I’ll take a look at the latest news and what it might mean for long-time Diageo shareholders (myself included).
North American trade update
On November 25, President-elect Trump took to his Truth Social site to update everyone on his plans for tariffs on goods from Canada and Mexico.
Trump wrote: “On January 20th, as one of my first Executive Orders, I will sign all the necessary documents to charge Mexico and Canada a 25% Tariff on ALL products entering the United States, and ridiculous Open Borders.”
This is not good news for Diageo, as the company imports Canadian whiskey into the US under its own ownership. Crown Royal. It is also an important player in the global tequila market, carrying famous Mexican brands Don Julio again The Casamigos.
Why hasn’t the stock arrived yet?
Diageo’s share price took a brief dive following the news, but has since recovered significantly. As I write today (28 November), it is actually up 1.2% to 2,383p.
I think the reasons for this are twofold. First, Trump likes to negotiate a deal. He even released a book in 1987, The Art of the Feastwhen he said:My negotiation style is simple and straightforward. I aim so high, and I keep pushing and pushing to get what I want.”
So, this seems to be the first step of negotiations. If Canada and Mexico agree to tighten border security, tariffs could be nowhere near as high as 25%.
Second, the global spirits industry is in a crisis, with consumers affected by inflation either drinking less or discounting cheaper brands. Diageo stock has already fallen 40% over three years.
This left it trading at a forward price-to-earnings (P/E) ratio of about 16.3. That’s a significant discount from previous years, suggesting that much of the bad news (perhaps even taxes) already has limited value in the equation.
Danger
However, analysts at Deutsche Bank don’t see it like that. They point out that imports from Mexico make up about a quarter of Diageo’s US sales, while Canada makes up another 16%.
Meanwhile, Trump has promised a 10% tax. everything goods from other countries, which may include those from the EU and the UK. Underlying all that, Deutsche Bank estimates there could be an 8% bump in Diageo’s earnings per share (EPS).
“We do not believe that this level of risk is reflected in it [alcohol] corporate values,” said the bank.
I’m not too worried
If these figures are accurate, that would put the forward P/E ratio closer to 17.5 than 16.3. So we may see the stock take another step as investors reassess valuations in terms of cost (if set).
Perhaps Diageo can effectively raise prices without losing sales in its important US market. We don’t know, and this uncertainty will likely hang over the stock for a while yet.
I do not plan to add to my position, as I am comfortable with its current size. The forecast dividend yield of 3.7% will hopefully provide comfort until the spirits market recovers (whenever that is).
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