The Diageo (LSE: DGE) share price has been on a relentless downward spiral for the past 18 months, and it just won’t stop.
This is a huge blow for investors who bought the stock after the profit warning in November 2023, thinking they were bagging a bargain. They weren’t, as I know to my cost. I was one of those bargain seekers.
I saw the initial drop as a temporary setback caused by slowing sales and inventory issues in just one of its markets, Latin America and the Caribbean. But what started as a minor correction has turned into a full-scale rout.
Diageo shares have plunged 30% over the last year and are now breaking yet another 52-week low after dropping 6% in the last week alone.
Can this former FTSE 100 hero fight back?
The global economic crisis has played a major role, triggering a shift away from premium spirits as consumers downgrade to cheaper tipples.
Troubles in China, a key growth market, have added to the pressure. On top of that, younger generations are drinking less alcohol, raising concerns about long-term demand.
All this has significantly dented investor confidence, mine included, driving Diageo’s price-to-earnings ratio down from around 24 times earnings to 15.5 times today.
On the bright side, the lower valuation means the shares now look more attractively priced. They also offer a 3.8% dividend yield, which is relatively high by Diageo’s standards. Diageo still has a brilliant range of drinks brands, including the most fashionable in the world right now, Guinness.
There have been flashes of optimism amid the gloom. On 5 December, Jefferies upgraded the stock from Hold to Buy, raising its price target from 2,300p to 2,800p. Today, the shares trade at 2,037p.
Just a week later, UBS issued a rare double upgrade, moving its recommendation from Sell to Buy and hiking its price target from 2,300p to 2,920p. It said Diageo “is towards the end of its earnings downgrade cycle”.
Still a volatile investment
I’m not sure we can say that today though. Just when Diageo looked like it might be stabilising, a new threat emerged – Donald Trump’s trade tariffs, particularly on Mexico and Canada.
They could hit Diageo’s tequila brands Don Julio and Casamigos, and whisky brand Crown Royal Canadian.
Yesterday, Trump threatened to slap a 200% tariff on all alcoholic products coming out of the EU. Of course we don’t know if he will, or whether that would extend to the UK, but it’s another worry.
Yet for now, analysts remain hopeful. The 21 experts offering one-year share price forecasts have produced a median target of 2,528p. If correct, that’s an increase of almost 22% from today’s 2,073p. We’ll see. Forecasting is precarious at the best of times. In today’s crazy world, it’s close to nonsensical.
As a Diageo shareholder, all I can do is sit tight and keep telling myself it’s always darkest before the dawn. But I’m less optimistic about its short-term recovery prospects than those analysts.
As this downturn drags on, I believe investors will need to be very, very patient while they wait for Diageo to fight back. At some point, the recovery should come. Probably out of the blue. Possibly at speed. I just have no idea when.
