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Diageo (LSE: DGE) shares were hardly fizzing with festive spirit as we started this year. Indeed, already down 37% over three years, they staggered into January like a drunken sailor.
Surely things couldn’t get any worse, could they? Unfortunately for long-suffering shareholders, the answer was yes. The FTSE 100 stock has dropped another 22% in 2025, taking the total decline to a sobering 51% since January 2022. This means a 10 grand investment made at the start of 2025 is now worth £7,800 on paper. Not great.
Granted, Diageo paid out a dividend in April, as it has done like clockwork for 25 years. But this would have only added roughly £124.
Now cut in half, might this unloved spirits stock be worth considering?
Brand power
My choice of tipple nowadays is Tanqueray with diet tonic and a slice of lemon. If I can’t get my first choice, I’ll go with Gordon’s gin. On a moody winter’s night next to a crackling tavern fire, I’m partial to a Guinness. At Christmas, a Baileys coffee.
Diageo owns all four brands, as well as Johnnie Walker, Smirnoff, Captain Morgan, and Don Julio premium tequila. The list goes on.
Just reminding myself of these incredible brands makes me want to scoop up some shares while they’re down! However, the stock hasn’t cratered for no reason, and it’s important to acknowledge the challenges here.
A bitter cocktail
The troubles started in 2022 when the firm was hit by double-digit cost inflation. Energy prices surged, along with the cost of glass, fertilisers, barley, hops, yeast, and transport. Everything, basically, all at once.
In response, Diageo raised prices on its premium brands, which ultimately hurt demand as consumers tightened belts. In Latin America and the Caribbean, drinkers started trading down, and unsold booze piled up in Mexico and Brazil. This led to a profit warning in late 2023.
Before all this, Diageo had aimed for between 5% and 7% annual sales growth over the medium term. That target has now been dropped, and weakness in the US and China isn’t helping. Neither are tariffs.
Adding to the uncertainty is the fact that younger generations are drinking less, while powerful GLP-1 weight-loss treatments might be lowering the desire to drink at all.
Sector downturn
Diageo’s peers have also been feeling the pain following the ending of the lockdown-fuelled drinks boom in 2021. The share prices of Pernod Ricard and Remy Cointreau are down 58% and 77% respectively, since January 2022.
Another issue worth highlighting is that Diageo’s net debt-to-EBITDA ratio’s climbed above management’s target of 2.5 to 3 times. It’s currently in the range of 3.3 to 3.5 times.
Fortunately, Diageo has levers to pull, with reports suggesting a possible sale of its Indian cricket franchise Royal Challengers Bengaluru for as much as $2bn. So I’m not too worried about this.
I think the investment case hinges on whether investors think this industry downturn is cyclical (temporary) or structural (problematic). I worry it might be the latter, so I’m not going to invest.
But if it’s the former, the stock looks like a bargain, trading at just 15.8 times forward earnings and offering a 4% dividend yield. It could have serious comeback potential, making it at least worthy of consideration.
