I’m struggling to get my head around the Diageo (LSE: DGE) share price. I can scarcely believe it’s fallen 45% over the last two years, and 30% in the last 12 months.
Isn’t this supposed to be one of the most solid UK blue chips? A defensive stock that holds firm in tough times and thrives in the good? Don’t people like a drink anymore?
Well, to a degree, they don’t. Or at least, they can’t afford the premium brands that Diageo sells. Many consumers have traded down to the rough stuff as the cost-of-living crisis bites. Sales have taken a hit in Latin American and the Chinese economic slowdown hasn’t helped. The US has been a drag for similar reasons. Gen Z are a sober bunch, it seems.
Can this FTSE 100 star shine again?
Now Diageo faces a fresh challenge in the shape of US trade tariffs. It faces uncertainty over the cost of exporting premium spirits like tequila from Mexico and whisky from Canada.
The board recently declined to provide forward guidance, citing “macroeconomic and geopolitical uncertainty”. That spooked investors further. If the board can’t say what’s going to happen next, how are investors supposed to get a handle on the stock?
As a contrarian investor myself, this should feel like a prime buying opportunity. A battered former stock market darling, now trading at a more attractive valuation amid wider disarray. Diageo’s price-to-earnings ratio sits just above 15, in line with the FTSE 100 average. Historically, it has commanded a premium valuation. The dividend yield has also nudged up to 4%, a rare sight for this stock. So, could this be the bottom of the glass?
There are reasons for hope. Overstocking issues in Latin America, a key force behind last year’s profit warning, appear to have been resolved. And Guinness remains the drink of our times, with the board swiftly sinking rumours of an £8bn sale.
Could it be a brilliant recovery stock?
CEO Debra Crew has a challenge on her hands. In the second half of 2024 operating profits fell 5% to $3.16bn, despite a small 1% rise in sales.
She’s outlined plans to improve working capital efficiency, which could ease balance sheet concerns. Still, the share price remains on a relentless downward spiral. I bought after the initial drop, averaged down twice since, and I’m still sitting on a 30% loss.
So where will the shares be this time next year? Now here’s the positive bit. The 21 brokers covering the stock have produced a median one-year target of 2,541p. If correct, that’s a 25% gain from today’s levels. A tempting prospect, but forecasts are just that – forecasts.
As one who’s taken a beating at the hands of Diageo, I can’t bring myself to believe in such a quickfire recovery. Some of these price targets may have been set when Diageo was trading at higher levels and before the tariff threat escalated.
I’m hunkering down and holding onto my shares, hoping the market turns in my favour. If I sell now, I’ve a nagging suspicion the Diageo recovery party will start without me. In 12 months, the Diageo share price could be anywhere. Now, that is something I can get my head round.
