The past four years have turned increasingly rough for shareholders of global drinks giant Diageo (LSE: DGE). When effective Covid-19 virus vaccines arrived in 2021, ending lockdowns and social restrictions, the world partied again. Hence, the Diageo share price soared to close at 4,036p on 31 December 2021. Sadly, it’s been downhill almost ever since.
Diageo dives
In early 2022, Diageo shareholders might have raised a glass or two to the firm’s management team. However, the share price’s heyday had passed. Indeed, this stock is one of the FTSE 100‘s worst performers over five years.
For the record, this Footsie share has dropped 14.2% over one month and 12.8% over six months. Even worse, the shares have plunged 29.3% over one year and 29.9% over five. Meanwhile, the FTSE 100 is up 11.7% over one year and 58% over five. (These returns all exclude cash dividends.)
In short, owning Diageo stock since 2022 has been a thankless task. I know this full well, as my family portfolio bought the stock at 2,780.8p a share in January 2023. Ouch.
Hangover cure?
At its 52-week high, Diageo stock touched 2,677p on 18 October 2024. As I write, it stands at 1,767p, valuing the group at £39.7bn (excluding debt). Therefore, the share price has crashed 910p — more than a third (34%) — from its one-year high.
Diageo has problems on three fronts. First, additional tariffs on US imports introduced (and later modified) by President Trump in April. These taxes make imported alcoholic drinks more expensive for American drinkers, reducing demand for Diageo’s brands.
Second, the industry faces calls for greater restrictions on alcohol sales, including health warnings similar to those on tobacco products. In America, this campaign is being spearheaded by Robert F Kennedy Jr, the controversial US Secretary of Health and Human Services.
Third, alcoholic drinks are increasingly expensive due to manufacturer price hikes, higher duties, and the new tariffs. Hence, young adults drink less than previous generations. Millennials and Generation Z increasingly prefer social media, video gaming, and legal (and illegal) weed.
With Diageo’s sales growth slowing and margins under pressure, earnings have fallen. This has pushed up its price-to-earnings ratio to 22.5. After the share collapse, the dividend yield is nearing 4.4% a year. In other words, nearly 100% of earnings goes towards dividends, perhaps a warning of a future cut?
What might turn this tanker around? Former chief executive Debra Crew announced her departure on 16 July, and has been replaced in the interim by Nik Jhangiani, the chief financial officer. I imagine the new permanent CEO will aim to clear the decks with new appointments and a thorough business review.
Having lost 36.5% of our investment in Diageo so far, I’m impatient for radical change at the company. Still, I’m not interested in selling at current price levels, preferring to hold on and hope for improved outcomes under the next CEO. For me, Diageo shares are firmly in the Footsie’s bargain bin — where they could stay for some time!
