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Remember the Covid-19 lockdowns of 2020-21, when we were mostly confined to our homes to avoid spreading the virus? When restrictions finally ended, people partied like it was 1999. And soaring alcohol sales sent the Diageo (LSE: DGE) share price leaping to all-time highs.
The Diageo share price slumps
Alas, Diageo shares have fallen pretty much ever since, with the stock now languishing well below its five-year high. On 31 December 2021, the share price closed at 4,306p. As I write, it stands at 2,269p, down a whopping 43.8% from this closing high.
What’s more, the shares are down 9.4% over one month, 4.2% over six months, and 23.6% over one year. Over five years, they have lost more than a quarter (28.3%) of their value. To sceptical investors, this once-great FTSE 100 firm resembles a ‘value trap’, delivering long-term losses.
That said, as an old-school value investor and contrarian, this blue-chip business is on my watchlist. However, I won’t be buying Diageo stock anytime soon, as my family already owns a chunk. We bought into this alcoholic-beverages giant in January 2023, paying 2,780.8p per share.
Unfortunately, this trade turned out to be rather ill-timed. Ignoring the cash dividends we got in 2024, we have lost almost a fifth (18.4%) of our initial investment. Hardly an ideal start to what I hoped would be a core FTSE 100 holding!
Sales growth is weak
The big problem for the maker of Guinness stout, Smirnoff vodka, and Gordon’s gin (and its shareholders) is that adults are drinking less than they once did. Hence, in its latest results, released on Tuesday (4 February), Diageo withdrew its previous guidance for mid-term organic sales growth of 5% to 7% a year.
While beer sales are rising, demand for spirits — especially high-end brands — is weak. Also, rising use of GLP-1 weight-loss drugs is reducing appetites for alcohol. And proposed US trade tariffs on Canada and Mexico could hit future sales, profits, and cash flow.
Then again, though sales volume is down 0.2% over the past six months, higher prices pushed up sales by 1%. Nevertheless, operating profit has fallen by 1%, while profit margins also declined.
This stock isn’t expensive
Based on the current Diageo share price of 2,269p, this stock trades on 17.6 times earnings, delivering an earnings yield of 5.7% a year. This means that the dividend yield of 3.6% a year is covered under 1.6 times by trailing earnings. These fundamentals look pretty solid to me.
Although its latest results were shaky and future sales growth looks unclear, I can see happier times ahead for Diageo shareholders. Sales growth should be positive in 2025, helping this £50.5bn Goliath to improve its cash flow and reduce net debt of $20.1bn. But I’m not expecting any big leaps in the dividend or the share price until this tanker has turned around!
