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The Diageo (LSE: DGE) share price can’t shake its almighty hangover, having fallen more than 20% over the past year and almost 50% in three years.
The trouble began with a profit warning in November 2023, after sales slumped in Latin America and the Caribbean. Cash-strapped local drinkers switched to cheaper domestic brands, while stock issues made matters worse.
Big FTSE 100 faller
Many thought that was a local matter, including me. I bought the shares at a reduced price a couple of weeks later, but there was more trouble to come.
Diageo boasts some of the world’s biggest spirits brands, including Guinness, Baileys, Smirnoff, Tanqueray and Johnnie Walker, yet even these iconic names aren’t enough to shield it from the global downturn.
Positioning as a premium drinks company worked wonders when pockets were full, but the cost-of-living squeeze showed its limits. The death of CEO Ivan Menezes in June 2023 after a short illness left successor Debra Crew facing a plunging share price, declining sales, US tariff threats and a cascade of other challenges. She left in July.
Latest results and the outlook
Latest results, published on 6 November, saw Diageo cut full-year sales and profit forecasts amid weakness in Chinese white spirits and a softer US consumer market.
Interim chief executive Nik Jhangiani said Q1 net sales were flat, with gains in Europe, Latin America and Africa offset by weakness in China and the US. The board is focused on cost-cutting, sharpening strategy, and embedding “a more rigorous performance-driven culture across the business”.
The first genuinely positive news came with the appointment of former Tesco boss Dave Lewis, announced on Monday (10 November). Known as ‘Drastic Dave’, he did a stellar job after his appointment in 2014, when Tesco was really on the rack. Today, it’s a blue-chip powerhouse, delivering share price growth and dividends. Equally drastic action is called for at Diageo today.
It’s quite a challenge. The cost-of-living squeeze continues, younger consumers appear to be drinking less, and it turns out that weight loss drugs can suppress the appetite for alcohol too. Alcohol-free alternatives might plug some gaps, but I just can’t see them replacing core brands. Lewis starts in January.
Potential income and growth
Brokers are optimistic. Consensus analyst forecasts suggest a median Diageo share price of 2,226p over the next year. That would mark an increase of roughly 20% from current levels, should it happen. Add the forecast dividend yield of 4.25% and that could turn a £10,000 investment into around £12,425. I’d be thrilled with that, although it won’t erase the 30% drop I’ve experienced so far.
Investors might consider buying with a long-term horizon and the understanding that even the most capable leadership cannot guarantee results.
The combination of iconic brands, disciplined management, and an attractive total return makes the shares worth watching. I might even average down and top up my stake, in the hope that Lewis can work his drastic magic again.