Having fallen nearly 30% in 2025 so far, drinks giant Diageo‘s (LSE: DGE) share price now sits around 1,820p. To put this in perspective, the stock hasn’t been this low in roughly nine years.
The word ‘crisis’ is arguably used far too often these days. Even so, I imagine such movement hasn’t been easy for holders of the stock. In fact, I’m now beginning to wonder, not when the FTSE 100 juggernaut will get its mojo back, but whether its best days are now behind it.
Here’s what’s got me worried
Diageo faces a few significant challenges.
The first of these is one that most of us will probably identify with, namely the high cost of living. When just paying for necessities has become an issue, people will naturally look to cut corners where they can. If they drink, it’s less than before. They may drink more at home before going out. They may also be moving to cheaper brands.
The second major challenge for the company is something few investors would have foreseen a decade or so ago. Blame the relentless rise of smartphones and social media but younger people, particularly those from Generation Z, don’t seem all that bothered by booze. That’s even if they do have cash to flash.
This cultural shift has been compounded by the popularity of weight loss drugs. While its long-term side effects remain unknown, early indications suggest Ozempic can dull the desire to consume alcohol in some people.
Any positives?
As grim as this sounds for Diageo, it’s worth dwelling on the silver lining to this particular cloud.
The stock is trading on a valuation not seen for…well, I don’t actually remember. A price-to-earnings (P/E) ratio of a little less than 15 for the firm’s next financial year (beginning 1 July) is significantly below the firm’s five-year average P/E of 23. One could speculate that this constitutes a sufficient margin of safety for any value-focused investor looking to take advantage of others’ fear.
Those searching for income from their portfolios might also be tempted by the 4.1% dividend yield. Sure, there are higher-paying stocks out there. But few boast as good a track record as Diageo. Thanks to its bumper portfolio of brands, it has consistently distributed (and raised) the amount of cash returned to investors, even if the latter is never guaranteed.
Show me the money!
As a long-term admirer, I should be chomping at the bit to finally load up on Diageo stock. But I’m not. At least, not yet.
Forget the impact of Donald Trump’s tariff tantrum and the subsequent removal of the company’s mid-term guidance. In my view, these are nowhere near as important as the foggy long-term outlook driven by those issues identified above.
As a Fool who buys stock with the intention of holding for years and decades, I need evidence that volumes are recovering. I then want to see sales actually growing at a fair clip in key markets such as North America, Europe, and Latin America. Without this, we could have a situation where the alcoholic beverage industry follows the same trajectory as the slow-dying tobacco space.
That should keep the dividend stream going for years. But it won’t give me the share price momentum I’m looking for.
