Earlier this week, I was studying the worst-performing FTSE 100 shares over the past year and five years. Many familiar names have fallen on hard times in the last half-decade, while the Footsie itself rose by 50.7% (excluding dividends). And one ‘fallen angel’ appeared in both lists of losers: Diageo (LSE: DGE) shares.
What’s gone wrong for this once-great British drinks business and its famous brands?
Diageo is depressed
Diageo stock is the FTSE 100‘s sixth-worst performer over five years and the eighth-worst over 12 months. This suggests that the rot set in several years ago and has yet to be stopped.
One obvious trigger for this trend was the Covid-19 crisis of 2020/21. During social lockdowns, Diageo’s global sales slumped. But when the world started partying again, group revenues and profits soared to new highs.
On 31 December 2021, Diageo stock ended the year at 4,036p — close to its record high. Unfortunately, the shares have plunged persistently since then. At their 2026 low, they slumped to 1,350p on 23 March.
However, since its spring low, the Diageo share price has bounced back. As I write, it stands at 1,584.6p, up 17.4% from this year’s bottom. This values the global drinks Goliath at £35.2bn — down a whopping 60.9% from its end-2021 valuation.
Suffering shareholders
For the record, my family portfolio owns Diageo shares, having paid 2,806.6p a share for our stake in January 2024. To date, we are sitting on a paper loss of 43.5% in roughly 30 months. Like other long-suffering Diageo shareholders, the post-Covid party turned into a nasty hangover for us.
But why haven’t I cut our losses by selling out and moving on? After all, to get back our initial investment, the shares would have to surge by 77.1% from their current price. To me, that appears a very tall order.
One reason I kept our shares is that they previously offered a trailing dividend yield of 4% a year. By collecting these cash payouts and reinvesting them by buying more stock, we boost our ownership level and our future returns. Then again, Diageo’s dividends are being cut by new CEO ‘Drastic’ Dave Lewis.
Another reason for holding is that I built our family portfolio to be a balanced, diversified asset base. By doing so, I hoped to build a long-term family fund that required little tampering.
What next?
Nearly 40 years of investing experience has taught me that I cannot predict the future. For example, the only UK share we sold in the past six years promptly soared weeks later, attracting a takeover bid at a hefty premium in May 2024. Oops.
Summing up, Diageo shares have been a disaster for shareholders for five years. But past performance is an imperfect guide to future returns, as I know all too well. The new CEO is taking radical steps to revamp this business by cutting costs to invest in strong brands and growing markets.
Finally, given its ongoing decline, Diageo might attract takeover bids from global rivals or cash-rich private-equity funds. At these price levels, industry bidders might find the group an attractive beverage to swallow!
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Cliff D’Arcy has an economic interest in Diageo shares.
