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The past 3 and a half years have been brutal for the Diageo (LSE: DGE) share price. Five years ago, the shares traded at around 2,567p, in early August 2020. Then, as the world celebrated the end of the Covid-19 crisis, the shares soared.
The golden time for Diageo shareholders was end-2021, with the stock closing at 4,036p on 31 December. After that, it’s been steeply downhill for the global drinks group’s shareholders.
Down, down, down goes Diageo
At its 52-week high, the share price hit 2,677p on 18 October 2024. However, since the re-election of President Donald Trump last November, the group’s performance has been pretty sickly on fears of higher trade tariffs.
Also, another big problem for Diageo (one of the world’s biggest suppliers of alcoholic beverages) is that “young adults are less keen to poison their insides for fun” — as I remarked recently to a group of financial analysts. Instead, social media, video gaming, and legal (and illicit) cannabis compete for the time and money of Millennials and Generation Z.
As a result, Diageo’s once-reliable sales growth has slowed to a crawl. In its latest set of results released on 5 July, the maker of Guinness stout and Smirnoff vodka reported organic sales growth of 1.7% in the year to end-June. At least this beat analysts’ forecasts of 1.4% growth.
However, a string of impairments plus higher restructuring costs pushed down yearly operating profits by 27.8% to $4.3bn. Diageo also warned that new US import tariffs could cut $200m more from operating profits in the 2025/26 year. That’s one nasty hangover.
Former chief executive Debra Crew has already jumped ship, with Diageo announcing her departure on 16 July. Despite this change at the top, the shares didn’t bottom out until 4 August, when they hit their 52-week low of 1,797p.
Ripe for a rebound?
When CEOs suddenly depart, it is traditional for major companies to ‘kitchen sink’ their next set of results. In other words, get as much bad news out of the way in one go, so as to give the incoming boss a clean slate.
One piece of good news is the FTSE 100 firm has increased its three-year cost-saving target by $125m to $625m. Perhaps this cheered investors, as the share price closed at 1,983.5p on Wednesday (6 August). This is up 10.4% from the low of two days earlier — a relief rally for Diageo shareholders.
After such steep price falls, this stock now trades on a modest multiple of 14.9 times trailing earnings, producing an earnings yield of 6.7%. This has lifted the dividend yield to just over 4% — above most Footsie companies’ cash yields. It’s also covered almost 1.7 times by historic earnings, which is a decent margin of safety.
I’ll sit tight
My family portfolio bought Diageo shares in January 2023, paying 2,780.8p a share. To date, we are sitting on a paper loss of 28.7% — among our worst investments since 2010. Ouch.
That said, I have no intention of selling at these depressed prices. While I am braced for low or no sales growth in 2026, Diageo’s fundamentals look pretty attractive to me as a value investor. Also, I’d argue that the shares were an obvious bargain on 4 August, but it seems I’ve missed that boat!
