The Diageo (LSE:DGE) share price began 2024 at just over £28 and finished at £25.37. That’s a 10% decline in a year where the FTSE 100 managed an overall gain of just under 6%.
Investors searching for explanations don’t have far to look. But the big question to consider is how far the challenges the company has been facing are going to be durable, as opposed to temporary.
Lower earnings, lower multiple
One reason the Diageo share price fell is earnings per share were lower than they were in 2023. A decline of around 16.5% goes a long way to explaining why the stock’s down.
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Diageo earnings per share 2015-24
Created at TradingView
It’s tempting to attribute this to a difficult trading environment – consumer spending has been weak in several countries, including the US. But this is only part of the story.
While no business is entirely immune to macroeconomic shifts, Diageo’s often seen as more resilient than most. So it’s a bit of a surprise to see profits falling.
Diageo price-to-earnings ratio 2024
Created at TradingView
As a result, the price-to-earnings (P/E) multiple the stock trades at decreased slightly, from around 20 at the start of the year to just above 18 by the end. This accounts for the rest of the drop in the share price.
Ongoing challenges
Diageo’s widely regarded as a quality business. While barriers to entry in the spirits industry are relatively low, its brand portfolio and the scale of its distribution set it apart from its competitors.
Given this, investors might have been willing to overlook lacklustre earnings if it was just the result of a temporary weakness in consumer spending. But there are other issues that look more durable.
One is the threat of tariffs from the US. This is a key market for Diageo and the prospect of increased costs associated with trading across the Atlantic will be an unwelcome obstacle to a recovery in profits.
Another is the rise of GLP-1 inhibitor drugs. These have the effect of dampening consumer enjoyment of alcohol, which could lead to lower demand over time.
Overestimating risk?
The ongoing risks with Diageo shouldn’t be ignored entirely, but I think investors are overestimating the scale of some of the challenges. In particular, this looks like it’s the case with GLP-1 drugs.
In terms of the US, around 40% of the population’s obese. So if around half of those people get access to the drug, that’s 20% of the country that might cut back on their alcohol intake as a result.
Any long-term threat to Diageo also depends on people staying on the treatment. Users that stop taking it tend to revert to their previous condition.
It’s also worth noting that the main demographics currently using GLP-1 treatments aren’t the major groups that make up Diageo’s customer base. So I think the market’s overestimating this risk.
What will 2025 bring?
I have a positive view on Diageo shares for the long term. But I’m much less confident in forecasting exactly when the share price will start to pick up.
It might be in 2025, or it may take longer. But I intend to keep buying the stock and collecting dividends while I wait for what I see as a likely recovery.
