Since the pandemic, Rolls-Royce shares have been the outstanding performer on the FTSE 100. On 30 September 2020, just before it completed a rights issue and successfully negotiated a debt restructuring, the group’s share price was 45p. Today (24 September), it’s comfortably above £11.50.
Owners of Diageo (LSE:DGE) shares will be hoping for a similar recovery. The stock’s fallen 56% since December 2021. It’s now back to where it was in September 2015.
But I believe the drinks giant has plenty going for it. It has a portfolio of over 200 brands including 13 worth over $1bn. In terms of sales value, it’s the world’s number one for spirits.
And it owns Guinness, which appears to be attracting a new generation of drinkers. According to Bloomberg, the stout’s brand is worth around $10bn.
Some big challenges
But I don’t think this is enough for Diageo’s share price to match Rolls-Royce’s recent performance.
The aerospace and defence group’s problems in 2020 were caused by a single event. The arrival of Covid-19 closed the world’s skies and the group’s aviation division immediately saw its revenue plummet. Once people started to fly again, its fortunes reversed.
In contrast to this, Diageo appears to be operating in a declining market. The company says: “Moderation is a long-term consumer trend, where we see consumers choose to drink better not more.” It’s clear Gen Z’ers aren’t drinking as much as their parents.
And if that’s not enough to contend with, the group’s suffering due to squeezed incomes. President Trump’s erratic approach to tariffs isn’t helping either. Potential medium-term problems include increased cannabis use and more widespread adoption of weight-loss drugs.
To try and adapt to this new reality, the group seeks to have brands that appeal to all price points in the market. And for teetotallers, it has non-alcoholic versions of its most popular drinks including Guinness 0.0, which seems to be doing particularly well.
A bit of a struggle
However, during the year ended 30 June (FY25), basic earnings per share (before exceptional items) fell 8.6%.
And organic net sales increased by just 1.7%. I suspect most investors expect the top line of a FTSE 100 company to grow faster than this. Similar growth is expected in FY26.
But despite its woes, free cash flow is forecast to be $3bn this year. And a falling share price means the stock’s currently yielding a healthy 4.3%, although the dividend could be cut if earnings continue to fall.
Of concern, until both the group’s top and bottom lines start growing again, I suspect its stock market valuation is likely to come under further pressure.
Very different
Rolls-Royce has exposure to three markets — civil aviation, defence and power systems — whose long-term fundamentals are solid. People are flying more, the world is a more dangerous place and the growth of data centres requires clever energy solutions.
It’s not the same for Diageo.
Having said that, it’s not Armageddon out there. From 2009-2024, global per capita consumption of spirits fell by an average of 0.4% per annum. Obviously, it would be better if the market was growing but with its powerful brand portfolio, it should be able to cope better than some of the smaller players.
Yet without evidence of a recovery, I don’t want to invest in Diageo.
