Are Diageo (LSE: DGE) shares mega-cheap? Really? Or am I over-egging this? It is Christmas, after all. A time of excess and all that. Maybe I’ve had too many Captain Morgans. Diageo sells that. Yet I stand by it.
The FTSE 100 spirits giant has had an absolute stinker of a year. All hangover, no kick. The shares are down 55% over three years and 33% in the last 12 months. I’ve held the stock for two whole years, having bought shortly after its initial profit warning in November 2023, and I’m suffering. So am I ready to sell?
Not a chance. I bought my loved one a bottle of Baileys for Christmas. Diageo sells that. I went to the pub on Christmas Eve and young people were necking Guinness like there was no tomorrow. Diageo sells that too.
The craft gin revolution may have peaked, but have drinkers really lost their taste for Tanqueray, another Diageo brand? That would be a first.
This FTSE stock can fight back
There’s a lot of talk about a new sober generation. Young people have given up the booze, just as older generations quit smoking. I’m not convinced. Humanity has been guzzling alcohol for millennia. Will that suddenly stop on our watch?
There’s no doubt these are volatile times for Diageo. In full-year 2025, reported net sales fell. By 0.1%. In that context, a 33% share price drop looks excessive to me.
Reported net sales still totalled $20.2bn. This isn’t exactly a company on the brink, whatever the share price suggests. Organic sales actually grew, while free cash flow climbed $100m to $2.7bn.
Maybe I’m being too bullish. Reported operating profit slumped 27.8% to $4.3bn in 2025, while net debt is now a hefty $21.9bn. That’s far from ideal.
Solid sales and cash flows
Investors are forward-looking, and 2026 looks sticky with organic net sales forecast to be flat or slightly lower. That’s a downer. Sales of Chinese white spirits are weak, while US drinkers are short of cash and staying dry. Europe looks more encouraging though. Diageo is sharpening its act, cutting costs, and installing a “more rigorous, performance-driven culture” across the business. It needs to.
It’s has got one big decision right, in my view. ‘Drastic’ Dave Lewis, the man who smoothly turned Tesco around, joins as chief executive on New Year’s Day.
I’m optimistic. Brokers are optimistic too. Consensus forecasts point to a one-year share price target of 2,126p. If correct, that’s up 26.7% from today.
The falling Diageo share price has pushed up the dividend yield. In 2026, investors are looking at 4.63%. Combined with that growth forecast, that’s a total return of 31.33%. It would turn £10,000 into £13,133. We’ll see.
Forecasts are just educated guesses. The global economy could struggle, markets could plunge, and recession is a risk. But with a price-to-earnings ratio of 13.5, Diageo now has a valuation cushion. Maybe not mega-cheap. But cheap enough for me to consider buying another splash of its shares. Then celebrate with a glass of Johnnie Walker. Diageo makes that too. Here’s to a happier new year!
