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The Diageo (LSE: DGE) share price has taken a beating in recent periods. It’s down 45% over three years and another 15% in the last 12 months.
The FTSE 100 drinks giant has been hit by everything from falling demand from cash-strapped drinkers to currency shifts, cost inflation, restructuring bills and trade tariffs.
FTSE 100 stalwart turned struggler
Full-year results on 5 August showed organic net sales edged up 1.7%, but it wasn’t the platform for a big share prie recovery. That was especially so with reported net profit plunging 39.1% to $2.53bn due to impairment charges and currency effects. Margins narrowed slightly to 28.2%
Cash flow remains strong though, with the board targeting $3bn a year by 2026, helped by stiffer cost savings targets. While Diageo isn’t the growth monster it was, it’s not exactly a company in peril.
The 2025 dividend was held at 103.48 US cents, the same as in 2024. Today’s 3.95% trailing yield is now just above the FTSE 100 average, but I would liked to have seen shareholder payouts increased. That said, during the glory growth years the shares typically yielded around 2%, so investors are getting more income today. Sadly, that’s done little to offset the capital losses.
Longer-term questions
The big issue is whether the drop in spirit sales is just down to economic concerns, or something deeper. Young people are drinking less. Some put this down to health concerns, but will they set those concerns aside when they have more money in their pockets? People tend to drink more in the good times. And there’s another issue. Weight loss drugs like Ozempic and Wegovy are also said to squeeze the desire for alcohol. Could that change the West’s drinking culture?
Diageo is investing in non-alcoholic drinks, but I can’t see this plugging the gap. Alternative meat products never took off. If I buy a burger, I want it to be beef. Otherwise I’ll have a salad. The principle applies with a G&T. I want real gin in it, although alcohol-free Guinness has taken off.
Last month (8 August) Goldman Sachs lifted its rating on Diageo from Sell to Neutral, citing its reasonable valuation and “limited downside risk”. Most of the bad news is in, or at least I hope it is. The question is whether we get some good news.
Growth forecasts
Goldman sees net debt falling next year, but kept its target price unchanged at 2,000p. That’s at the lower end of the stock forecast scale. Consensus suggests Diageo shares could climb 17.5% to around 2,338p over the next year. Frankly, I’d be delighted by that, although it would still leave me in the red.
I think the next year looks bumpy and tariffs are still a worry. Diageo shares trade on a price-to-earnings ratio of around 16, which is lower than before but doesn’t scream bargain.
I think investors might consider buying if they believe the turnaround is real, but I’ll temper my expectations. The Diageo share price may not fall much further, yet the spark needed for a full revival is still missing. Although experience suggests these things do tend to come out of the blue. With that in mind, I’ll hold.
