Why does the Diageo share price continue to fall?

While the UK stock market is rising, the Diageo share price is falling. Here, Edward Sheldon looks at what’s going on with the FTSE 100 company.

| More on:
Young Asian woman with head in hands at her desk

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Diageo (LSE: DGE) share price is locked in a nasty downtrend at the moment. While the FTSE 100 is rising, it’s going in the opposite direction.

So what’s going on? And as an owner of the alcoholic beverages stock, should I buy, sell, or hold?

What’s going on with the share price?

In my view, there are several factors putting pressure on the share price at the moment.

One is the fact that growth has stalled due to a weak environment in the US (the company’s largest market). This financial year (ending 30 June 2024), analysts don’t expect any revenue growth from the company.

Another factor is uncertainty around GLP-1 weight loss drugs such as Wegovy and Ozempic. According to Goldman Sachs, the market for these drugs could be worth $130bn annually by 2030. Given that they can reduce the desire to consume alcohol, this could be a problem for Diageo.

A third issue is uncertainty over drinking habits in the future. Younger generations today are quite focused on their health. They also want to look good on social media. As a result, they’re drinking less than generations before them.

Finally, investors simply don’t have much confidence in management at the moment. After the group’s recent profit warning, investors are not fully behind newish CEO Debra Crew.

What I’m doing now

I’ve owned Diageo shares for quite a while.

I first started buying them in 2017 when they were around 2,000p. When they climbed above 4,000p in 2021, I took some profits off the table but held on to the bulk of my position.

As for my move now, I’m going to be holding (and perhaps buying).

Yes, there’s some uncertainty in relation to weight-loss drugs and younger generations’ drinking habits. These issues cloud the outlook for sales growth in the years ahead.

Yet I remain confident in the long-term story given the company’s powerful brands (Johnnie Walker, Tanqueray, Don Julio, Smirnoff, etc) and global reach. Over time, I think they should benefit from rising wealth in developing economies.

That said, I’m not expecting the stock to stage a dramatic rebound in the near term. Sentiment towards it is quite ugly at the moment. This is reflected in the downtrend.

For the shares to go up, Diageo needs to win back the confidence of investors and prove that the growth story is still intact.

The good news is that after the big share price fall, the stock is now looking quite cheap. Currently, the forward-looking price-to-earnings (P/E) ratio here is about 16.8. That strikes me as low for a company of Diageo’s pedigree. Given that earnings multiple, I don’t think the stock is likely to go much lower (assuming there are no more profit warnings).

So, for now, I’m just going to hold tight and be patient.

If the shares do keep falling, I’ll probably snap up a few more.

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.

Edward Sheldon has positions in Diageo Plc. 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.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »