On 28 October, I wrote that the Diageo (LSE: DGE) share price is driving me to drink. After Thursday’s (6 November) first-quarter update, mine’s a double.
Diageo shares have now slumped to a 10-year low, a remarkable fall for a company once regarded as one of the safest FTSE 100 blue-chips. Investors have had to swallow one disappointment after another, and today was no different.
Diageo cut its full-year guidance, citing weakness in Chinese white spirits and a slowdown in North America. Organic net sales are now expected to be flat to slightly lower for 2026, with operating profit growth only reaching low-to-mid-single digits.
Interim chief executive Nik Jhangiani tried to reassure the market about flat Q1 net sales, talking up cost discipline, efficiency plans and early wins in Europe, but these comments felt vague and a little bit needy. Investors don’t need talk, they need results. Diageo shares fell 2.7% in response.
FTSE 100 fail
The board’s targeting $625m of cost savings as it aims to generate $3bn of free cash flow, but it has to knuckle down to achieve those ambitious targets. That won’t be easy given that it doesn’t have a permanent CEO, following Debra Crew’s July exit. It desperately needs a strong new management team in place before it can reverse its decline.
Diageo shares are now down 24% over one year and more than 50% over three years. I’m personally down more than 40%, and that’s despite buying it after the initial profit warning in November 2023 that started its decline.
On top of the disappointing numbers, there are long-term structural threats. Younger people are drinking less, weight loss drugs could reduce older consumer demand, and the cost-of-living crisis is dragging on.
That said, I like buying solid FTSE 100 companies when they’re having a bad run. They’re typically cheaper and yield more too. That’s certainly the case here. Diageo’s price-to-earnings ratio is now 14.3, well below the FTSE 100 average of 18 (it used to be comfortably above). More details on how to value shares can help those considering a move.
And the trailing dividend yield is now 4.56%, double what investors used to get. So anybody buying today will get some dividend income, while they wait to see if Diageo can get back on a steady footing.
They say it’s always darkest before the dawn, but the lights have been dimmed at Diageo for two years now. Contrarian investors might consider buying, but only with bags of patience. This could be a long and bumpy recovery.
I’ve learned my lesson: tread carefully around profit warnings because they’re often a sign of deeper structural problems.
Waiting for a turnaround
These are tough times for consumer stocks. I think Diageo can swing back and recover, but it will take time. I will hold onto what I’ve got, in the grim hope of reversing some of my losses. I won’t be averaging down by purchasing more though.
I can see plenty of other good value FTSE 100 shares that are further down the road to recovery, and will focus my efforts on them.
