When it comes to defensive FTSE 100 stocks, Diageo (LSE: DGE) has long been seen as a dependable choice. The firm’s the world’s largest premium spirits producer, behind household names including Guinness, Johnnie Walker, Smirnoff and Tanqueray. With a broad global footprint and iconic brand portfolio, Diageo’s historically provided steady returns for long-term shareholders.
But the last few years have been sobering.
Price performance that’s hard to stomach
Over the past 12 months, the stock’s dropped by 25%, and is down 33% over five years. Trading today at £18.95, it’s quickly approaching its 10-year low of around £16, last seen in August 2015. That’s a worrying trend, especially for investors like myself who had high hopes of this defensive stalwart protecting their capital during volatile markets.
Valuation metrics don’t offer a clear signal either. Its price-to-earnings (P/E) ratio of 15 looks attractive for a major blue-chip stock, but its price-to-sales (P/S) ratio of 2.7 tells a more cautious story. Revenue’s declined by 3.88% year on year, while diluted earnings per share have fallen by 11.33%.
These figures hardly inspire confidence.
The dividend’s holding – but for how long?
Diageo still pays a respectable 4.2% dividend yield, which offers some comfort. However, dividend growth’s been paused — a significant change for income investors who’ve come to expect consistent hikes.
More concerning is the company’s £17bn debt burden, which is almost twice its equity base. While a company of this scale’s unlikely to default, this level of leverage makes it vulnerable to higher interest rates and limits its strategic flexibility.
When companies need cash for debt, dividends often see the axe first.
What’s going wrong – and is there a path to recovery?
Diageo’s been hit by a combination of macroeconomic challenges and shifting habits. High inflation has tightened consumer budgets, with many shoppers now opting for cheaper brands or prioritising essentials over unnecessary luxuries. And among younger generations, alcohol consumption’s declining, with more and more Gen Z’ers favouring low- or no-alcohol alternatives.
Rivals such as Pernod Ricard are facing similar issues, but Diageo’s performance has been weaker in certain key markets, notably Latin America, where sales have slumped.
To its credit, it’s actively trying to reshape its portfolio, investing in non-alcoholic brands and experimenting with premium ready-to-drink offerings. But there’s no telling yet if this will be enough to reverse the current situation.
Hanging on to hope
Despite the recent struggles, I still believe alcohol’s a resilient category. It’s been a part of human culture for thousands of years and I simply can’t imagine it would vanish overnight. Diageo still boasts a healthy net margin of 19% and an impressive return on equity (ROE) of 35%, suggesting the core business remains strong.
If the company can streamline operations and regain momentum in underperforming regions, a recovery’s possible. But with debt high and earnings under pressure, I won’t be buying more shares until I see clearer signs of a turnaround. For now, I’ll keep holding – but if it drops below £16, I’ll consider cutting my losses.
