Every time I think Diageo (LSE: DGE) shares are about to pull out of their slump, another crisis drags them back down. How much more can investors take?
The FTSE 100 spirits giant was once seen as one of Britain’s most reliable companies. That changed with a shock profit warning in November 2023. As it related mainly to falling sales in one region, Latin America and the Caribbean, I hoped this would prove a temporary blip and bought in. Unfortunately, the business has lurched from one problem to another since then.
As the cost-of-living crisis swept the world, Diageo’s strategy of focusing on premium brands backfired. Drinkers began trading down to cheaper options to save money. Inventory issues didn’t help.
Beaten-down FTSE 100 stock
The company could do little about US tariffs that hammered sales of Canadian whisky and Mexican tequila. Long-serving chief executive Ivan Menezes died suddenly in 2023, leaving successor Debra Crew to brave the storm as profits continued to fall.
As if that wasn’t enough, the group now faces two longer-term threats. Younger consumers appear to be drinking less alcohol, while weight-loss drugs such as Wegovy and Mounjaro may also suppress the desire to drink. About the only bright spot has been the booming popularity of Guinness.
I welcomed the board’s decision to appoint former Tesco turnaround specialist Dave Lewis as chief executive after Crew’s swift departure. I even averaged down after the announcement. But I had one nagging concern.
When Lewis arrived at Tesco, he began with a classic bout of ‘kitchen sinking’, digging up as much bad news as possible and getting it out into the open. It made the short-term picture look dreadful but created a cleaner platform for recovery. And he’s done it again at Diageo.
Profits are still falling
Full-year results released on 25 February sent the shares tumbling once more. Adjusted operating profit slipped 2.8% to $3.3bn, while the company cut 2026 guidance for the second time in three months. Organic net sales are now expected to fall by between 2% and 3%, amid weak US sales and a slump in Chinese white spirits.
Lewis also delivered the blow I feared most. Just as Diageo was starting to look like a respectable income stock with a 5% yield, he halved the dividend. He says the move will boost the balance sheet and financial flexibility. Diageo shares are now down around 30% over the past year and nearly 50% over two.
I’m not happy, but I’m not selling. Lewis has spied new growth opportunities and dismissess the idea that younger consumers have permanently turned their backs on alcohol. If Diageo isn’t at the point of maximum pain yet, it must be getting close. The recovery may take two or three years, but I still believe it will come. For now, patience is required.
In today’s volatile markets, the shares could be worth considering for investors with a long-term view. If they fall further, I may even average down again myself. That said, plenty of other FTSE 100 stocks look attractively priced right now. And without the same massive issues Diageo has.
