Everything about Diageo (LSE: DGE) shares screams disaster. Once one of the biggest and brightest blue-chips on the FTSE 100, the spirits giant now looks like a bombed-out wreck. How has it come to this?
The Diageo share price is down 57% over five years and still won’t stop falling. I’ve snapped up the stock on four occasions, each time convincing myself I was getting in at a bargain price. Wrong. In total, I’m down a third.
Yet I haven’t sold. I keep telling myself that things are going to get better. I just need to be patient.
What’s gone wrong with this FTSE 100 stock?
Just look at those brands, I say. Johnnie Walker, Baileys, Smirnoff, Tanqueray and even Guinness, for crying out loud. Don’t people enjoy a drink any more?
Well, plenty of us do. But many have switched to cheaper forms of firewater, to survive the cost-of-living crisis. Diageo went big on the premium drinks market, hoping its high-end brands would dazzle the aspirational. That’s backfired given the current squeeze.
And increasingly, younger people don’t like a drink. Cash-strapped and clean living Gen Z-ers are a threat to Diageo’s bottom line. So are GLP-1 weight loss drugs, which apparently curb the desire for booze as well as food.
Yet still I cling onto my Diageo shares. While taking advantage of dips to buy more. The shares look good value today, with the price-to-earnings ratio falling just below 13. That’s roughly half its peak. But still they fall.
The dividend yield doubled to more than 5%, giving investors the consolation of income. But don’t expect that today. Incoming boss Sir Dave Lewis slashed the dividend in half, to boost the bottom line.
I still believe it can recover
Despite that, Lewis is the main reason I’m clinging on. He put Tesco back on its feet when it was down and out. I’m hoping he’ll repeat the trick here. He’s following the same playbook since joining in January. Throw out all the bad news to reduce expectations and give himself room for manoeuvre. Then do his drastic worse by slashing headcount and selling off non-core assets.
He’s also pivoting Diageo towards the mass market, by targeting the ready-to-drink canned cocktail market. It’ll take more than that to turn around a £35bn giant though. Especially one whose net debt tops £16bn.
Yet still I cling to the recovery story. It took Lewis 18 months to get the Tesco share price moving, so these are still early days. We’re due a major strategy update on 6 August. Expect more drastic measures.
Ultimately, I’m a believer in both Diageo and Lewis. Plenty still enjoy a drink, and if the global economy ever picks up, they may enjoy one more regularly. And I believe Lewis is the right person for the job. I’ve also got the ugly suspicion that if I ever sell my shares, they’ll rocket.
So I still think Diageo shares are worth considering, but the road to recovery isn’t going to be an easy one.
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Harvey Jones owns shares in Diageo.
