Following the fortunes of the Diageo (LSE: DGE) share price has been like watching replays of your team getting knocked out of the World Cup: same pattern, same result, same sinking feeling. But is that about to change?
I’ve been on a losing streak since adding the FTSE 100 spirits giant to my portfolio in November 2023, shortly after it’s original profit warning over falling sales in Latin America and the Caribbean. Diageo may boast a brilliant array of star names, led by fan favourite Johnnie Walker, but that doesn’t help if you get the tactics wrong.
Can this FTSE 100 loser be a winner again?
Chasing the premium end of the drinks market seemed wise, until the cost-of-living crisis struck and drinkers downgraded to cheaper brands. Like all struggling teams, Diageo’s board can blame bad luck. They’ve had plenty of that.
Donald Trump’s tariffs, a struggling Chinese economy, the rise of weight loss drugs, a whole generation that isn’t so keen on drinking alcohol, and the shocked death of inspirational CEO Ivan Menezes were beyond Diageo’s control. On the other hand, it did get lucky with Guinness, suddenly the coolest drink in the world.
Now it’s pinning hopes of a recovery on new managerial appointment Sir Dave Lewis. He’s got star quality and a stellar track record. Also, like every football manager these days, he’s got his own philosophy. He took drastic measures at Tesco and Unilever, slashing costs and sharpening the businesses. He’s about to take drastic measures at Diageo. There’s a reason he’s called ‘Drastic Dave’.
Lewis, who joined in January, is rolling out his restructuring plan. He’s set managers stiff cost-cutting targets, which sadly will include job losses too.
Diageo employs 30,000 worldwide, and the mood in the London head office is said to be “funereal” as they wait for the axe to swing. But drastic action’s required, with the share price down 55% over five years. Can it revive Diageo’s shares? We’re about to find out.
It won’t be easy. Spirit sales are falling, either because the world is having a fit of sobriety, or because we’re just feeling a bit skint. Tackling weak sales in North America is the biggest task. That’s Diageo’s largest market.
Are you up for the challenge?
Lewis is also targeting younger, mass market drinkers with canned cocktails and the like. Like I said, drastic times.
The aim is obvious, and set out in February. To redesign the group’s operating framework and “drive sustainable returns for shareholders by delivering a more competitive Diageo”. Frankly, it had to happen.
Diageo looks good value with a trailing price-to-earnings ratio of 12.2. Ignore websites showing dividend income of 5.27%. That’s the trailing yield. Following a big cut, the forward yield is just 2.66%.
Diageo’s going for growth and Lewis had better deliver it. Given his track record, I think the stock’s worth considering for investors who understand the risks and are up for the challenge. Game on.
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Harvey Jones owns shares in Diageo.
