The FTSE 100 is packed full of dividend superstars. That’s my name for companies that have consistently increased their shareholder payouts for at least a couple of decades.
Weirdly, they’re rarely the ones with the biggest yields. Instead, they typically offer a long-term story of small but steady dividend hikes and solid share price growth. Their share prices don’t always rise though. Spirits giant Diageo (LSE: DGE) is a glaring example.
It has a brilliant dividend record, hiking payouts every year for more than 25 years. The increases haven’t been massive, just 2.32% a year on average over the past decade, but they’ve been dependable. The yield was typically below 2.5%, but investors didn’t care because the share price usually marched upwards.
Low spirits
Not any more. The Diageo share price has crashed almost 30% over 12 months. It’s now at a 52-week low, trading around 1,933p, and down nearly 50% in three years. It’s back to levels last seen a decade ago.
Problems began with a profit warning in November 2023 as drinkers in Latin America and the Caribbean switched to cheaper local brands, rather than the premium spirits Diageo had focused on. Falling sales in the US and China added to the pressure. Then came trade tariffs, with Mexican tequila and Canadian whisky caught in the crossfire. Forecasting profits became too tricky, so Diageo stopped trying.
Even when President Trump hit pause on tariff threats, it did little to lift the gloom. Diageo shares have fallen another 10% in the last month.
On 19 May, Diageo released third-quarter results covering the three months to 31 March. Organic net sales rose 5.9%, but that was mostly due to “significant phasing benefits” that may reverse in Q4. In Asia Pacific, consumers kept downtrading.
Income still flows
Diageo estimated a $150m annualised hit from tariffs, but hopes to mitigate around half through cost-cutting and other moves. Management aims to deliver $3bn in annual free cash flow and save $500m over three years. That should help maintain its proud dividend record.
Despite all the troubles, the board has increased the dividend by 5% in each of the last three years.
Today, the yield has climbed to more than 4%. That’s rare for Diageo, and almost entirely due to the falling share price. But it does make today a more tempting entry point.
And at some point, the shares could recover. Analysts are optimistic. They’ve pencilled in a median 12-month price target of 2,420p, 25% higher than today. Throw in that yield and investors could see a total return close to 30%. Remember, this is a forecast, not a guarantee.
Risky recovery play
Diageo shares trade at around 15 times earnings, which looks decent value. During the glory years, they traded around 24-25 times.
Holding Diageo has been painful. There are longer-term threats, too. Younger people seem to be drinking less. Weight-loss drugs could reduce alcohol consumption further.
I bought after the November 2023 profit warning, and have been kicking myself ever since. But with the yield up, valuation down and signs of stabilistion, brave investors might consider buying. But they may have to suffer more pain first.
