Can Diageo’s new chief financial officer help to reverse the falling share price?

Despite Diageo’s weaker share price, a revitalised management and a focus on strategy execution look set to keep the dividend growing.

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With the Diageo (LSE: DGE) share price trending down, the company announced Friday (3 May) that Nik Jhangiani will become chief financial officer (CFO) in the autumn.

Can Jhangiani help to reverse the fortunes of the ailing premium alcoholic drinks business? It’s possible. He’ll be part of the top team of executives and likely involved in strategic decision making.

Plenty of relevant experience

Since 2016, he’s been CFO at Coca-Cola Europacific Partners, “the world’s largest Coca-Cola bottler”. 

He’s got 20 years’ experience under his belt in CFO roles and has spent most of his career in consumer and beverage industries. The appointment looks like a good fit for Diageo.

Chief executive Debra Grew said Jhangiani’s experience and international mindset will make him a “strong addition” to the leadership team. 

For me, Diageo’s declining share price has been painful to watch. I’ve written much about the strength of the firm’s brands and the company’s defensive qualities.

However, my assumptions about the business are being challenged. The situation is a reminder to me that even Diageo can lose money for investors. All stocks carry risk as well as sometimes having positive potential – even the traditional defensives.

Lower earnings

Near 2,750p, the stock’s down around 25% over the past year, building on a decline that began at the beginning of 2022.

It’s the usual culprit – earnings. According to analysts, Diageo’s on course to deliver a decline in normalised earnings of almost 17% for the current trading year to June.

That does two things. Firstly, there’s a need for the share price to adjust lower if the valuation is to remain constant.

Secondly, lower earnings and a loss of momentum in a business tend to shake investors’ confidence. That can lead to the market reassessing a company and reducing its valuation. In other words, a P/E of 20 may reduce to, say, 15.

In Diageo’s case, the valuation’s been meaty for as long as I can remember, based on the solid and consistent performance of the enterprise. Perhaps that’s changing now.

The worldwide cost-of-living crisis appeared to affect the business more than I thought it would. In January’s interim release, the company said “materially” weaker performances in the Latin America and Caribbean regions had “impacted” total business performance. 

The dividend is still rising

However, despite these (hopefully) short-term challenges, I’m still optimistic about Diageo’s prospects. The lower valuation now may be an opportunity for investors.

The dividend looks set to rise a bit next year, and the forward-looking yield is running at just above 3%. That’s the highest in years, and the income may be worth having if the business can re-find its growth mojo.

Looking ahead, Grew is optimistic. There will be a strong focus on execution and the company will continue to invest in its “world-leading” brands. It’s an attractive sector and Diageo has a long runway for growth, Grew insisted.

On balance, I’m inclined to give the company the benefit of the doubt and see the business as well worth further research and consideration now. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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