Diageo (LSE:DGE) shares have got off to a flyer in 2026. Up 11% since 1 January, the FTSE 100 company has trimmed losses over the last year to 20%.
Worries over drinks demand are rumbling on though, as people in the West consume less alcohol and weight loss jabs become more popular. But the mood around the company is improving as hopes of a sales recovery grow (more on this later). The question is, can the Guinness maker’s shares keep shooting higher?
A turnaround story
An examination of Diageo’s profits and dividend forecasts could shed some light on this.
City analysts reckon earnings will sink 28% this financial year (to June 2026), following a 9% drop the year before. The good news is they also think Diageo’s profits are poised to turn higher. Earnings are tipped to recover in FY27, rising 5%, with growth accelerating to 7% the year after.
So what does this mean for dividends? Last year’s payout was 79.39p per share. It’s tipped to drop to 73.71p this time round as earnings slump.
However, that expected profits rebound should underpin a recovering dividend too, say City analysts. Cash rewards of 76.73p and 79.7p are predicted for financial 2027 and 2028, respectively.
Will dividends be cut?
The problem is that those dividend forecasts look pretty fragile. Predicted dividends are only covered around 1.6 times by expected dividends over the next few years. Borrowings are also sizeable, with net debt of $21.9bn as of last June pushing its leverage ratio to a weighty 3.4.
It’s also possible the dividend could be cut as new CEO Dave Lewis begins his business overhaul. Reducing the dividend was among his first actions when he took over Tesco in the mid-2010s.
Diageo plans to get net debt-to-adjusted EBITDA down to 2.5 to 3 times “no later than fiscal 28,” and dividend reductions may be needed to help this.
Now the good stuff
While I’m not so confident about dividends, I’m optimistic that Diageo’s share price can stage a recovery from 2026. Under turnaround specialist Lewis, I’m hopeful the business can wave goodbye to years of underperformance, helped by much-needed divestments of weak labels. There’s also likely to be extensive streamlining to improve core focus and remove costs.
It’s also possible sales will begin to bounce back this year as falling interest rates boost consumer spending. The FTSE firm’s most recent update in November wasn’t exactly spectacular — it showed flat organic sales growth in Q1 — but it perhaps revealed the first green shoots of recovery. Sales had been steadily slipping before then, and had been tipped to drop 1.3% by City analysts.
I’m certainly upbeat on Diageo’s outlook over the longer term. Emerging market demand for its heavyweight labels like Captain Morgan and Smirnoff is tipped to rebound strongly. I’m also hopeful its push into non-alcoholic versions of its popular labels will keep paying off.
Are Diageo shares a Buy?
The share price drop in recent years leaves the valuation around multi-year lows. At 14.7 times, the company’s forward price-to-earnings (P/E) ratio is miles below the 10-year average of 21.
Does this make Diageo shares worth consideration? I think so, even though the company still faces some challenges. I’ll think about increasing my own stake when I next have cash to invest.
