Tariff reform: a potential game changer for 1 of the FTSE 100’s top dividend stocks
Equity investors looking for stocks to buy have a lot to think about Diageo (LSE:DGE) recently. But the equation is likely to change in a big way over the weekend.
One of many things FTSE 100 the company has been fighting lately with tariffs on US sales. But the Supreme Court recently overturned these, so will the stock bounce back?
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What just happened?
The Supreme Court ruled that the decision of the President of the United States to impose taxes on different countries without the consent of Congress was illegal. And that is very important for several reasons.
Tax uncertainty has been one of the biggest themes moving the stock market as a whole since the last election. And Diageo has been one of the most affected companies.
Sir Dave Lewis may have a reputation for bravery. But even the most powerful CEO cannot do anything about the fact that it is impossible to produce Scotch whiskey in the USA.
As a result, Diageo found itself affected by prices. And this, combined with weak consumer spending outside of high-income earners has been a major problem for the company.
What happens next?
So what happens next? The President has announced plans to introduce new tariffs, but reports are emerging that refunds for affected companies may be on the cards.
Acting as its Exporter of Record, Diageo may be eligible to benefit if firms that have paid prices can claim their money back. That might be a big improvement, but it’s not entirely accurate.
Across the board – not just Diageo – there are proposals for US consumers to end up taking on more costs. So whether businesses are the right compensation or not is not clear.
If that is correct, however, the tax deferral should cause consumer spending to strengthen. And that’s where companies – including FTSE 100 firms – stand to benefit in a significant way.
Is Diageo in the clear?
Tariffs haven’t been Diageo’s only problem lately. Another concern has been the emergence of GLP-1 drugs, which have been heavy on demand and remain high risk.
One of the limiting factors with GLP-1s, however, is cost. And that looks set to remain the case as US regulators clamp down on cheap versions produced by the likes of His and hers.
Whatever one thinks about ethics, it means that prices are likely to remain high. That’s good Eli Lillybut not anyone who can afford $300 a month.
It’s also good for Diageo. Except for those covered by Medicare and Medicaid, higher prices may reduce uptake and the elimination of cheaper alternatives should support this.
Opportunity to buy?
My thinking for a long time has been that Diageo’s shares look like good value. But investors waiting for signs of recovery haven’t had much to go on in the past few years.
That, however, looks like it may be changing. Things are starting to look very good for the company and the share price is starting to bounce back from its recent decline.
At today’s prices, there is still a 4.5% dividend yield on offer. So I think the encouraging signs from the underlying business mean it might be a good time for investors to consider buying.
