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I remember the days when the Diageo (LSE: DGE) share price had all the sparkle of a Tequila commercial. At times, it felt like the ultimate no-brainer FTSE 100 buy, boasting a portfolio of the most famous spirits brands in the world, including Johnnie Walker, Guinness, Bailey’s, Smirnoff, Tanqueray and Captain Morgan.
Then it all went wrong. Its focus on the premium market backfired as the cost-of-living crisis forced drinkers to cut back or trade down. Tariffs have hit Diageo hard too.
Even investors who bought after the first profit warning in November 2023 are hurting, with the shares down 27% over the last 12 months. Incredibly, they’ve now halved in three years. Doesn’t the world like a drink anymore?
FTSE 100 underachiever
Possibly not. Younger generations are drinking less, while new weight-loss drugs such as Wegovy appear to dull cravings for booze as well as food.
The business still makes piles of cash but growth is proving elusive. It doesn’t face an existential threat, yet it may slip into the same category as tobacco companies. That means selling something plenty of people disapprove of but still consume, providing reliable cash flows without much growth.
The dividend yield isn’t at tobacco stock levels, but at 4.27% on a trailing basis it’s double what investors got during its freewheeling years. Forecasts suggest little change, with 4.3% pencilled in for 2026.
Debt now stands around £16bn, which is starting to look hefty for a business with a shrunken market cap of £40bn. Sales in 2025 were flat at $20bn, but reported operating profit fell 27.8% to $4.34bn. Margins collapsed by 819 basis points to 21.4%, as impairment and restructuring costs, and unfavourable exchange rates piled on the misery.
Valuations in focus
The share price-to-earnings ratio has dipped just below 15. I remember when it was routinely 24 or 25. Investors’ expectations have been reset. From here the company needs to clear the decks, push through the bad news, and rebuild.
I’m finding it difficult to be optimistic right now. So I’m intrigued to see analysts’ forecasts, which are in a much happier place than I am.
Consensus projections suggest the shares could climb to 2,332p over the next 12 months, which would be a massive 28% jump from today’s 1,820p. I’d love to see that happen, although it would still leave me under water on my holding. It also feels a little bit starry-eyed to me.
The global economy is still struggling, including in key markets like the US and China. I don’t expect a sudden cocktail boom to change the picture overnight. We’re just not in the mood. For the company to justify that rapid predicted rally, it’ll need to deliver some very tasty numbers. That won’t be easy, although it may help as impairments fall out of the annual numbers.
I do expect progress of some kind from today’s depressed level. For investors who believe today’s abstinence is just a temporary blip rather than a generational shift, I think Diageo is worth considering. Yet we can’t simply assume that just because it was big once, it will be big again. But I’m hoping those brokers prove me wrong.
