Just when it looks like Diageo (LSE: DGE) shares have finally turned a corner, down they go again. What I hoped was the biggest recovery play on the FTSE 100 now looks more like a value trap. So which is it?
I bought the stock after its first profit warning in November 2023 and I’ve averaged down three times since. Despite that, I’m down almost 35%.
The cost-of-living crisis has battered Diageo’s premium drinks strategy as consumers trade down to cheaper brands. The weakness first appeared in Latin America and the Caribbean but quickly spread to the US, Europe and China. It was aggravated by US tariffs, currency volatility, Gen Z sobriety and the rise of GLP-1 weight-loss drugs.
Can this FTSE 100 stock recover?
Contrarians who got excited by the recovery story and threw £10,000 at the Johnnie Walker, Baileys, Smirnoff, Guinness and Tanqueray maker last week will have a bitter aftertaste today. The Diageo share price opened at 1,609p on 28 May. Today (4 June) it trades at 1,485p. That’s a fall of 7.7%, reducing that £10k stake to £9,230. It’s a paper loss of £770 in a matter of days.
Of course, shares move up and down all the time and investors should look beyond short-term setbacks. But the longer-term trend is grim. Diageo shares have plunged 25% over one year and almost 55% over five.
Dividends may soften the blow, but not by much. Especially after new broom CEO Sir David Lewis halved the interim payout on 25 February.
Can Lewis rescue Diageo?
Lewis also cut guidance after sales and underlying operating profit both dropped 2.8%. That triggered Diageo’s worst trading day on record, with the shares plunging 12.7% in a single session. This tipple is all hangover and no fizz. A quick glance at operating profit over the last five years explains why.
- 2025 — $4.34bn
- 2024 — $6bn
- 2023 — $5.55bn
- 2022 — $5.9bn
- 2021 — $5.16bn
The sharp 2025 decline largely reflected impairment charges and restructuring costs, but the figures still make sober reading. Diageo’s Q3 trading update on 6 May brought some relief though. Sales edged up 0.3% to $4.5bn. Analysts had expected a 2.3% decline. Earlier Easter trading helped (but could impact Q4). So did advance trade buying ahead of the FIFA World Cup.
I still see reasons for optimism. Lewis engineered a remarkable turnaround at Tesco and I’m backing him to repeat the trick here. He began his tenure at Tesco in 2014 by chucking every bit of bad news at investors, a process known as kitchen sinking. That hammered expectations and created a lower base for recovery. He’s followed the same script at Diageo. Arguably, he had little choice. There’s so much bad news here.
Is the share price finally cheap enough?
Diageo also carries net debt above $20bn and rising interest rates make that more expensive to service. One thing looks cheap though. The valuation. The group’s price-to-earnings ratio has slipped to around 12, the lowest I can remember.
Lewis will slash costs and push disposals to reduce debt, and I’ll be watching his progress like a hawk. I’m sorely tempted to average down again, but Diageo’s recovery may take a while yet.
Should you invest £5,000 in Diageo Plc right now?
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Harvey Jones owns shares in Diageo
