The Diageo (LSE: DGE) share price has experienced a dramatic collapse over the last three years, falling more than 40%. I’ve experienced this nasty decline first hand as I own the FTSE 100 stock in my Stocks and Shares ISA.
Can shares in the Johnnie Walker and Guinness owner recover in the years ahead? Or is this stock now dead money? Let’s discuss.
Why’s the share price fallen?
First, let’s recap why the shares have tanked. There are a few reasons including:
- A slowdown in its major markets after the pandemic (when people spent a lot of money on top-shelf booze)
- Excess inventory problems, particularly in Latin America
- Concerns that younger generations are drinking less alcohol
- Concerns that GLP-1 weight-loss drugs like Wegovy and Ozempic are reducing demand for alcohol
- More focus on the link between alcohol and cancer
- Lack of confidence in the new management team (legendary CEO Ivan Menezes died in mid-2023)
- Rising bond yields (dividend stocks like this tend to lose some appeal when bond yields are higher)
Overall, the company’s faced quite a few challenges.
Is a recovery on the cards?
As for whether the shares can recover, this issue seems to divide opinion.
There are still plenty of investors that are confident in the long-term growth story here. A good example is British fund manager Nick Train, who runs the Lindsell Train UK Equity fund. At the end of 2024, Diageo was the second largest holding in his fund (9.9% of the portfolio). He continues to back in the power of Diageo’s brands and believes the company’s worth a lot more than its current value (£54bn).
On the other hand, there are investors who believe the company’s likely to struggle going forward. An example here is Terry Smith, who runs the popular Fundsmith Equity fund. Last year, he sold his entire holding in Diageo after holding the stock for more than a decade. He cited problems with the new management team and also said the emergence of GLP-1 weight-loss drugs has changed the outlook for the company (although he’s still invested in Jack Daniels owner Brown Forman).
We suspect the entire drinks sector is in the early stages of being impacted negatively by weight-loss drugs
Fundsmith portfolio manager Terry Smith.
My glass-half-full view
Personally, I’m cautiously optimistic that the shares can recover over time. I believe many of the current issues (consumer demand, excess inventory, etc) are relatively short-term in nature.
In relation to GLP-1 weight-loss drugs, I’m not totally convinced they’re going to significantly reduce demand for booze. Although I will admit there’s some uncertainty here.
That said, I’m concerned about demand from younger generations. This is the biggest risk with the stock, in my view. Recently, I read that 36% of UK adults under 25 say they’re non-drinkers. That’s quite a high figure.
The good news is that Diageo continues to hike its dividend payment. Currently, the shares are yielding about 3.6%. This means that while I hold my shares I’m being paid to wait for a recovery in the share price. Of course, there are no guarantees it will recover, so I’m putting money into lots of other stocks to hedge my bets.
