I’ve made a big punt on Diageo (LSE: DGE) shares and, so far, it’s been a losing one. This is a stock I’d wanted to buy for years, and I finally dived in a couple of weeks after the shares plunged following a profit warning as sales fell in Latin America and the Caribbean. I paid £28 per share.
That was in November 2023, and it turned out to be the start of Diageo’s troubles rather than the end. But are things finally starting to look up for the FTSE 100 spirits giant?
Blue-chip recovery prospect
I topped up my position in August 2024 at £25, only to watch the shares slide further as more bad news emerged. That included US tariffs hitting its Canadian whisky and Mexican tequila brands, alongside generally sluggish sales as the cost-of-living crisis spread around the world.
Undeterred, I gave it another shot on 13 January at £17 a pop, which instantly reduced my paper loss from 40% to 25%.
Diageo could still turn out to be a classic value trap. It faces two potentially existential threats. First, younger people appear to be drinking less than us heroic older generations, as the health and wellness cult tightens its grip. Second, and linked to that, new weight-loss drugs are said to dampen the desire for alcohol as well as food, making those virtuous lifestyles easier to maintain.
I’ve even wondered whether Diageo could end up like a tobacco stock, selling an increasingly unfashionable product to a shrinking, ageing audience. Then again, tobacco shares have been spectacular investments over the years, especially for income seekers.
With its price-to-earnings ratio now below 15, the Diageo share price looks much better value than it did, while the trailing dividend yield has crept above 4.5%.
I like buying good companies on bad news, but Diageo has reinforced an old lesson. Jumping in too early can be painful. A profit warning often opens the door to further disappointments. The shares are down 50% over three years and more than 20% over the past 12 months.
That slump dragged the stock to a 10-year low, which was another lure. Surely the world isn’t giving up booze that easily.
FTSE 100 fightback
January suggests not. It’s early days, but so far this year Diageo shares are up 10.54%. That would have turned a £10,000 investment into £11,054. Not bad, and a reminder of how quickly sentiment can shift when investors rotate back into a beaten-down stock.
These are volatile times, and those gains could evaporate just as quickly. Concerns about long-term attitudes to alcohol haven’t gone away either. Still, with turnaround specialist Dave Lewis having taken charge from in January, I’m cautiously optimistic. Lewis earned a reputation for taking drastic action at Tesco, and Diageo may need plenty of that. Although I’m worried about rumours that he might cut the dividend.
Diageo shares are starting to get exciting and I think they’re well worth considering. A stronger global economy would help this one really shine.
