In January, some City experts were tipping Diageo (LSE:DGE) shares to be among the FTSE 100’s top performers in 2026. The appointment of Sir Dave Lewis as the group’s chief executive was widely welcomed.
But things don’t appear to have gone as expected. So far (16 July), the share price performance has been underwhelming and investors appear unconvinced. But could this be about to change? Let’s see.
What’s wrong?
Although Diageo was one of the few companies to benefit from the pandemic, it’s now facing a fundamental industry-wide problem. Specifically, there’s evidence to suggest that Gen Zers are drinking less than their parents. And those consuming alcohol are moving to more up-market brands, a trend known as ‘premiumisation’.
The result? A slowing in Diageo’s net sales growth since the year ended 30 June 2021 (FY21), as follows:
- FY21: +16.1%
- FY22: +19.3%
- FY23: +0.2%
- FY24: -1.4%
- FY25: -0.1%
Set alongside higher supply chain costs, there’s been a significant impact on the group’s bottom line. Since the pandemic, it’s reported earnings per share (before exceptional items) as follows:
- FY21: 158.8 cents
- FY22: 201.9 cents
- FY23: 196.5 cents
- FY24: 179.6 cents
- FY25: 164.2 cents
The group’s also carrying heavy borrowings. At 31 December 2025, its net debt was $21.7bn, over three times its FY25 EBITDA (earnings before interest, tax, depreciation, and amortisation).
Not over yet
But I still think the group has lots going for it. It owns some of the biggest names in the business. In fact, it has brands worth $13bn (based on global sales). All of these are positioned towards the premium end of the market, which should help with the current trend towards more refined drinking.
Analysts’ consensus is that the group’s shares offer good value at the moment. Their target of £19.26 is around 27% higher than the current share price.
Also, a recent deal suggests its shares are undervalued. Last December, the group sold its interests in two businesses in Africa for 17 times EBITDA. If Diageo was valued similarly, its shares would be worth over twice as much!
Don’t get me wrong, I’m not saying an £80bn+ market-cap is justified. But it does point to an under-appreciation of the group by the City.
Incidentally, Africa was the only region to report sales volume growth when the group released its FY26 half-year numbers.
What next?
So far, Sir Dave’s been relatively quiet about his plans although conventional turnaround initiatives like a headcount reduction and asset sales are underway. In terms of products, it’s believed that he’s looking to capture more of the growing ready-to-drink canned cocktails market.
To preserve cash, he’s also slashed the group’s dividend by 50%. We will learn more on 6 August, when the group’s strategy update is released.
Personally, I think now could be a good time to consider buying Diageo shares. The last time the stock was trading consistently around £15 was in early 2012. I have faith that the turnaround will soon start to take effect and, assuming it does, I suspect the share price will move steadily higher.
This could come as early as next month if the group can show it’s growing again and investors like the new strategy.
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James does not hold any positions in the companies mentioned.
