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I’ve bought Diageo (LSE: DGE) shares on four occasions over the past two years, and every time the same thing happened. They kept falling. What I thought was a bargain turned out to be a persistently falling knife. Will its troubles ever end?
The FTSE 100 spirits giant has been hit by one problem after another, including falling Latin American sales, stocking issues, US tariffs, the sudden death of inspirational CEO Ivan Menezes, and swift departure of successor Debra Crew.
FTSE 100 falling knife
The result? Shares in one of the UK’s most admired blue-chips have slumped 55% over three years and 30% in the past 12 months. My response? To buy even more. A couple of weeks ago, I made my biggest single purchase yet. That instantly reduced my overall paper loss from 40% to 25%. So how did the share price respond? It fell.
I’m frustrated, but I still think there’s a strong chance that 2026 is the year Diageo fights back. Have I lost my mind?
With the price-to-earnings ratio down to just 13.9, compared with 21.5 when I first bought, it feels as though we’re getting closer to the point where expectations have been properly reset.
Another factor that persuaded me was the January appointment of former Tesco boss Dave Lewis, nicknamed ‘Drastic Dave’ for his ruthless focus on cost-cutting and simplification. Before Tesco, Lewis spent almost three decades at Unilever, specialising in brand building. Diageo has the brands, including Johnnie Walker, Guinness, Baileys, Smirnoff and the rest, but now comes the hard work of building them up.
Diageo is lining up a potential $2.7bn sale of its underperforming Chinese assets and has closed the Clynelish Distillery visitor centre in Scotland. In December, it sold its stake in East African Breweries for $2.3bn. I expect a lot more along those lines. Especially with net debt above $24bn last June.
Debts and disposals
I accept things could deteriorate before they improve. That’s what happened at Tesco. Lewis began there with a bout of ‘kitchen-sinking’, getting all the bad news out there and resetting expectations. My big concern is that he trims the dividend, which would be disappointing given the yield has crept up nicely towards 5%. I may have jumped in a little early with my latest purchase. It won’t be the first time.
Lewis has positives to build on. In August, Diageo reported net operating cash flow of $4.3bn, up from $4.1bn, while net sales dipped a mere 0.1% to $20.25bn. However, operating profit fell a bruising 28% to $4.33bn.
My biggest concern is this. People seem to be drinking less, and not just Gen Z. The next wave of weight-loss pill could accelerate the shift. Whether that trend eases as household finances recover remains to be seen.
If I am mad, I’m not alone. Diageo is now the third most bought UK stock among retail investors, after Taylor Wimpey and Legal & General Group, according to Winterflood. It’s probably no coincidence that I’ve been buying them too. I think Diageo will come good. I won’t buy more though. I’ve got the juice. Now I want some sparkle.
