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The Diageo (LSE: DGE) share price has been through the wringer. It has suffered a perfect storm of setbacks, and the latest uncertainty over trade tariffs is only part of the story. The FTSE 100 spirits giant was struggling long before Donald Trump struck.
The trouble started in November 2023, when Diageo issued a shock profit warning after a slump in sales across its Latin America and Caribbean markets, having overstocked and then having to work down inventories.
The wider global slowdown has also tempered demand in key markets such as the US, Europe, China and parts of the emerging world.
One major problem has been consumers trading down to cheaper alternatives rather than sticking with the premium brands Diageo’s built its name and reputation on.
The company also faces the growing challenge of changing social habits, as younger generations seem to be drinking less than their predecessors.
US tariffs have added another layer of difficulty. Tequila imports from Mexico and whisky from Canada, two of Diageo’s key product lines, were among the first to be hit. Even if a UK-US trade deal is agreed, the outlook for Mexico and Canada remains unclear.
Latest interim results, published on 4 February, highlighted the pressures Diageo’s facing. Reported net sales dipped by 0.6% to $10.9bn, despite a 1.0% rise in organic net sales, after currency movements took a toll.
Operating profit fell 4.9% to $3.16bn, with margins slipping to 30.3%. Growth in four out of five regions helped offset some of the pain, but it remains a difficult time to sell booze.
The Diageo share price reflects all of this, tumbling 25% over the past year, and nearly 50% over three.
That’s a brutal decline for a blue-chip stock that regularly traded at a hefty premium to the wider market.
Dividend and potential growth… one day
At least the valuation now looks much more reasonable. Diageo shares trade on a price-to-earnings ratio of 15.8, in line with the FTSE 100 average. The dividend yield stands at a fairly attractive 3.76%, slightly above the index average.
Risks remain high. Trade tariffs are front and centre, but concerns about an economic slowdown and longer-term shifts in drinking habits can’t be ignored. Yet with the shares trading at a five-year low, despite a slight bounce over the last month, I have a sneaking feeling this could mark the bottom. Analysts seem cautiously optimistic too.
The 22 professionals covering the stock have set a median 12-month target of 2,434p. From today’s 2,108p, that would imply a gain of more than 15%. After everything Diageo’s been through, that would represent a decent recovery. I’m currently down 25%, so that would still leave me in the red.
I’ve already backed Diageo heavily and I won’t be buying more. Even if the recovery story plays out, I expect it’ll be a rocky road.
Still, the mood around the stock is so gloomy right now that this could be a classic ‘darkest before the dawn’ moment. Long-term investors might consider buying it today, but first they must consider the risks.
