The Diageo (LSE: DGE) share price has sparked a lively debate among writers on The Motley Fool in recent days, and it’s easy to see why. For years, this was one of the FTSE 100’s most dependable blue-chips. Everybody likes a drink, don’t they? Apparently not, because Diageo has been in apparent freefall.
Shares in the Guinness and Smirnoff maker have plunged to a 10-year low. After peaking around 4,000p in 2020, when the world was stuck at home perfecting lockdown cocktails, they’ve slumped to 1,638p. That’s a brutal 60% peak-to-trough collapse.
Investors like me, who treated the initial dip as a buying opportunity, have taken a kicking and it doesn’t seem to stop. The shares are down 35% over the past year. The Fool’s debate was this: is this the FTSE 100’s most compelling bargain, or a value trap that will keep draining investors’ wealth?
The immediate spark for debate was this week’s 2024 Health Survey for England, which suggested we’re drinking less. One in four adults said they hadn’t consumed alcohol in the past year. Striking still, the biggest drop was among young men. Wow!
FTSE 100 struggler
This is my biggest concern as a Diageo shareholder. We’ve heard repeatedly that Gen Z has lost its appetite for the demon drink, a trend that weight-loss drugs could accelerate. But there’s a twist. The survey also showed people in more deprived areas tend to drink less than their wealthier neighbours. That hints at affordability rather than abstinence, a cost of living issue that could ease if the economy improves, rather than a permanent cultural shift.
If that’s right, Diageo suddenly looks far more attractive. It owns a formidable stable of global brands, has enormous reach, and has been battered by factors largely outside its control, from squeezed consumers to US tariffs. The valuation looks tempting too. The shares trade on a price-to-earnings ratio of just 13.6, down from around 25 at the peak.
The dividend yield has climbed to 4.85%, compared with roughly 2% in better times. On paper, it screams value. Unless we really are giving up alcohol for good. I’m not convinced. Diageo still can’t brew Guinness fast enough, while Smirnoff still flies off the shelves. If consumers loosen their purse strings, they may trade back up to the premium brands Diageo specialises in.
Recovery play or value trap?
There’s also new leadership, with turnaround specialist Dave Lewis at the helm. If he can repeat the trick he pulled at Tesco after its hangover, shareholders could be in for happier days. Then one sceptical Fool burst my bubble by arguing that Diageo needs a “booze insider, not a retail man”.
So I looked further afield. Twenty-one analysts currently cover the stock and they produce a consensus one-year price target of 2,036p. That’s about 24% above today’s level. Add the yield and investors are looking at a potential total return approaching 30% (assuming Lewis doesn’t cut the dividend, as some predict).
But even here, there’s a big split, with forecasts ranging from a low of 1,454p to high of 2,690p. Personally, I’m sticking with the optimists. At prices not seen in a decade, I think Diageo is well worth considering. But remember, opinions vary.
