Diageo (LSE:DGE) shares have lost more than half their value since the turn of 2022. Not only is this bad in itself, but during this time the FTSE 100 index has jumped around 30%.
In other words, investors could have made far better returns elsewhere in the FTSE 100 over this period. And for the record, I’m speaking from (painful) experience, as I owned Diageo in my own Stocks and Shares ISA until the start of this year.
However, since I pulled the plug, shares of the spirits giant have fallen another 27%. This makes them cheaper and the higher dividend yield far more appealing.
So, should I reintroduce Diageo back into my portfolio? Let’s find out.
The great debate
As many readers will know, the firm owns a truly outstanding portfolio of world-class brands. These include Johnnie Walker, Tanqueray, Gordon’s, Smirnoff, Don Julio, and Baileys. Oh, and the evergreen phenomenon that is Guinness!
Just writing this list — which is in no way exhaustive — makes me wonder how on earth the stock is down 55% in less than four years. The is key to working out whether there’s an incredibly lucrative buying opportunity here or not.
Nobody seems to be sure why exactly sales across the alcohol industry are in the doldrums. Is it because many consumers are under financial pressure? Younger people are drinking far less booze? Are GLP-1 weight-loss drugs playing a part?
These are the questions underpinning the cyclical-structural debates going on in financial circles right now. Put simply, are Diageo’s sales under pressure simply because people are skint, or are there deeper consumer behaviour changes at play?
If it’s the former, then the downturn could be cyclical and temporary. And therefore this is a potential opportunity to buy Diageo shares on the cheap. But if it’s the latter, then overall alcohol volumes might never start growing again, and could even go into reverse.
Bright spots
Unsurprisingly, Diageo’s in the former camp, arguing that near-term pressures are being driven by macroeconomic issues. It says US households are spending 20% more for 7% less products than they were in 2020. So premium drinks and parties are being deprioritised.
Yet, it’s not all doom and gloom for Diageo, by any stretch. Last year, premium tequila brand Don Julio enjoyed double-digit growth in all regions, while roughly one in every nine pints poured in the UK nowadays is Guinness.
To lean into the non-alcohol trend, Diageo plans to offer Guinness 0.0 in every UK pub that has the stout on draught. Meanwhile, the hit show House of Guinness on Netflix won’t be doing the brand’s cool reputation any harm among younger consumers.
What do the experts say?
Analysts are somewhat divided right now, with 14 rating the stock as a Buy, and a further 10 saying Hold or Sell. However, the average 12-month share price target is 32.5% above the current 1,768p.
As mentioned, the stock is offering a decent dividend yield (4.3%), while trading cheaply at just 13 times forward earnings. And with a new permanent CEO set to be unveiled sooner rather than later, the stock may have strong turnaround potential.
However, I’m still unsure myself. I’ll wait to see what Diageo says in its Q1 2026 trading statement later this week.
