Sometimes market sentiment towards a stock just seems wrong, and I think that when I look at the Diageo (LSE: DGE) share price.
I reckon this is a company with a solid defensive moat and it deserves a premium rating. But with a forward price-to-earnings (P/E) ratio of 16.5, it hasn’t really got one. And what edge it might have would be lost if forecasts are right and it drops to 14.3 by 2027.
What’s so good about it? Having a good time? Think celebrate, think Johnny Walker, think Smirnoff, think Guinness… think Diageo. Feeling down? It might not be the best thing to do, but that makes plenty of people reach for a drink, too.
Think contrarian
Does the Diageo share price, down 50% from the heights it reached in late 2021, bring out the contrarian investor in you? It does with me. And it seems it does with that ace contrarian, billionaire investor Warren Buffett.
Buffett’s Berkshire Hathaway holds Diageo — it’s the only UK-listed stock in its whole portfolio. While it’s listed in London though, Diageo is really a global business selling over almost the entire globe.
Just because Buffett bought it doesn’t mean Diageo is an automatic buy for the rest of us. No, he’s often made mistakes, sometimes big ones. And he’s open about them.
But with Berkshire having produced average annual gains of 19.9% between 1965 and 2024, it seems history largely supports Buffett’s frequent approach of going against the market.
Business headwinds
Before I get too excited, I need to remember that Diageo has actually been facing a bit of a tough market when it comes to alcohol sales and profits. And the company is in a bit of a refocusing phase at the moment — what it calls its Accelerate programme.
With full-year results released on 5 August, interim CEO Nik Jhangiani said the firm has “much more to do across our broader portfolio and brands“. And he spoke of “creating a more agile operating model“, as the company raised its cost-savings target to around $625m over the next three years.
Diageo saw net sales dip 0.1% in the 2025 year, with reported operating profit down 27.8%. That latter was due to exceptional items, however, and without those we see a 0.7% decline in the underlying figure. Earnings per share fell 8.6% excluding exceptionals.
Looking forward
Diageo expects little change in sales in the next 12 months, “given a continued challenging market“. But we should see free cash flow rise to about $3bn, from $2.7bn in the year just ended. That’s a good start.
I look back to Aviva going through its refocus phase and thinking the shares looked cheap at the time. And we’ve seen how well that turned out. Then we have the amazing recovery at Rolls-Royce Holdings, led by a critical shakeup of the business.
There’s plenty of risk investing in a company that’s in the midst of a struggle, even if it’s not an existential one. And Diageo might continue limping along for a few more years yet. But I do think contrarian investors can do well at time like this and should consider Diageo now.
