It’s no easy feat getting a place on the FTSE 100. The companies that do are usually very well-established and unlikely to fail.
My portfolio consists mostly of companies from the index — solid growth stocks and reliable dividend shares. Unlike volatile small-cap shares, they don’t demand much of my attention. I seldom check on them, confident they will maintain stability and growth in the long term.
However, there’s one stock that’s dragging down my overall returns. I’ve been optimistic about it for some time but my patience is wearing thin. With losses of almost 25% in the past year, I’m wondering if it’s time to admit defeat.
Let’s consider its prospects.
Nursing a hangover
Had someone asked two years ago what my top three favourite shares were, alcoholic beverage giant Diageo (LSE: DGE) would’ve been among them. But since August 2022, the Smirnoff and Guinness producer has been in decline, losing over a third of its value.
Even the 3% dividend yield does little to relieve the hangover from these losses.
Much of them result from diminishing sales in Latin America and the Caribbean (LAC), where the lingering effects of Covid hurt the economy. Cash-strapped consumers opting for lower-cost alternatives appear to have shied away from its popular brands. But with inflation falling and the economic situation improving, I expected a recovery this year.
No such luck
In its July earnings results, sales were down for the first time since 2020. Despite an 8.2% rise in reported operating profit, the share price still fell 10% on the day. The situation is so bad, that analysts are starting to question whether Diageo could become a potential takeover target.
Despite the drop, it still commands a 75% share of sales in measured markets, with growth in most regions. With the losses mostly concentrated in the LAC region, even a mild recovery there could turn things around. Earnings are forecast to continue falling until mid-2025 and then recover through 2026.
Not alone
Diageo is the tenth-largest company on the FTSE 100 and it’s no surprise why — the company commands a massive share of the international alcohol market. With a huge brand portfolio including Johnnie Walker, J&B, Seagram, Don Julio, Tanqueray, and Bell’s, it’s hard to go a day without seeing its products on shelves.
One of its biggest competitors is Brown-Forman, the US drinks giant behind Jack Daniel’s Whiskey and Herradura tequila. It’s had an even worse year, down 35%. What about the popular French outfit Pernod Ricard? The same fate — a 32% decline.
Adapting to change
This suggests an overall decline in alcohol consumption globally. Surveys have found a change in drinking habits among younger generations, with low-alcohol and no-alcohol brands becoming more popular.
Why do I feel like this has all happened before?
Because it has. Almost two decades ago, cigarettes fell out of fashion and vapes started to take over. But 20 years later, British American Tobacco is still going strong. By working with regulators and adapting to changing times, it managed to survive.
I hope Diageo takes note, and soon. If not, I may have to break one of my cardinal rules and sell the shares at a loss.
