You share Diageo (LSE:DGE) recently fell 12.5% today (25 February) as FTSE 100 The company announced a 50% dividend reduction. I am a shareholder, so what should I do with my investment now?
Warren Buffett says it’s never a good thing when a company lowers its dividends. But in some cases, it can be the right decision and I think that is the case here.
Image source: Getty Images
It’s not surprising
The share price has reacted aggressively to the recent news. In doing so, it reversed almost all the gains it had made since Sir Dave Lewis took over.
However, my view is that investors should not be surprised. I said back in December that I was making plans for potential dividend cuts and suggested that other investors might want to do the same.
Another reason is that it’s not uncommon for a new CEO to want to start over, especially in a turnaround situation. And cutting the dividend was one of the first things Lewis did Tesco.
Since then, reports have surfaced that Diageo is looking to sell some of its non-core assets to raise cash. But doing that while sending money as dividends would be a poor use of money.
Strategic view
Along with budget cuts, Diageo has announced plans to focus on being more competitive on prices. This may result in lower rates, but the hope is that volume growth should make up for it.
The spirits market in the US is stable and declining sales are coming from losing competitors. But I am wary of changing strategies in the current situation.
The situation in the US is that inequality is increasing. Low-income families have faced increasing budget pressures while high-income families have often remained vulnerable.
In that environment, trying to increase the mass market appeal of Diageo’s products seems risky to me. It involves moving away from the company’s identity as a company focused on premium products.
What I do
Dividend cuts could be a bad thing for investors looking for income in the next few years. But from a long-term perspective, I think the move is good for business.
Although I am not fully convinced about the strategic change, Diageo has some key strengths that could make this approach successful. Another measure of its distribution.
Generally, companies that want to be competitive on price need some way to keep their costs down. And economies of scale are a good example of this.
As a result, I am very optimistic about the future of the company. So I plan to hold my shares for now and see how things go.
There is no sale
I fully agree with Diageo’s decision to reduce its dividend. I’ve thought for a long time that this might have been in the cards and I think it’s the right thing to do.
I’m less convinced, however, about the shift to price competition. But at today’s prices, I think there’s good value on offer, which is why I’m not looking to sell after today’s announcement.
