Poor Diageo (LSE: DGE) shares. The FTSE 100 spirits giant used to look impregnable with a simply unmatchable array of global brands, from Johnnie Walker to Gordon’s, Smirnoff, and Baileys. And, of course, it owns Guinness, which recently became the coolest drink in the world after influencers decided no selfie was complete without a pint of the black stuff in hand.
Despite these advantages the Diageo share price has slumped 46% over three years and 18% in the past 12 months. My Self-Invested Personal Pension (SIPP) has been left nursing a serious hangover, with little sign of the headache easing.
FTSE 100 growth shocker
Other out-of-favour consumer stocks in my SIPP have shown flashes of recovery lately, notably Burberry, JD Sports, and Ocado Group. Diageo has not. Is it time to cut my losses?
The group’s troubles can be traced back to November 2023 when it shocked markets with a profit warning linked to weaker sales in Latin America and a build-up of unsold stock.
That wasn’t a one-off issue. On 5 August, the group reported a 28% drop in annual operating profit to £3.8bn. CEO Debra Crew stepped down after less than two years in charge, and Diageo needs to find a permanent replacement. It also needs to locate its lost mojo.
Tariffs add to the woes. Diageo expects a $200m annual hit from new US levies on spirits. It’s trying to mitigate the blow with “inventory management, supply chain optimisation and reallocation of investments”, while hiking its cost-cutting target from £500m to £625m. It’s not all doom and gloom though. It did generate $2.74bn of free cash flow this year, and expects $3bn in 2026.
Sober market mood
Investors have punished the stock. Diageo shares are now back to 2015 levels and there are long-term concerns too. Younger drinkers are cutting back, whether for health reasons, affordability, or as a strange form of rebellion. This undermines the traditional view of alcohol stocks as a defensive consumer staple.
In a rare positive, Goldman Sachs recently lifted its rating in August from Sell to Neutral, suggesting there’s limited downside from here. It didn’t call the stock a Buy, though. I’m not sure I would either.
Long-term investment
Diageo trades at a price-to-earnings ratio of 16.9, which is a lot cheaper than it used to be, but doesn’t exactly cry screaming bargain to me. The trailing yield is 3.75%. Which is okay.
Consensus forecasts produce a one-year price target of 2,329p. That imples growth of almost 12% from today. Throw in the dividend and investors could see a total return of 15%. I’d take that.
I’m personally down 30% and getting itchy feet. However, selling now risks missing out on the recovery, if we get one. I typically buy shares with a minimum five-year of view, so I’ll continue holding for now. Diageo may never be the force it once was, yet it only takes one set of expectation-beating results to spark a revival. Investors might consider buying if they believe in the long-term drinks story.
For now, I’ll keep the stock in my SIPP. I’m betting that by taking the long-term approach, I will eventually toast a recovery. So far, it’s been a losing bet.
