Investors who thought Diageo (LSE: DGE) shares were finally ripe for a recovery have had a brutal wake-up call today (25 February), as full-year 2026 interim results brought yet more bad news. How long can this go on?
I’ve personally bought shares in the FTSE 100 spirits giant five times since the meltdown began in November 2023, triggered by a profit warning as sales in its Latin American and Caribbean market slumped. Despite being one of Britain’s most admired blue-chips, a globally diversified operation with a fantastic array of drinks brands, the news just keeps deteriorating. So is today’s dip the end of the road, or the start of something special?
Serial FTSE 100 struggler
A word of warning. My glass has always been half full with Diageo. Every time the shares have fallen in the last two-and-a-half years, I’ve added another chunk to my SIPP. Today, its glass looks pretty empty. Yet I’m still tempted.
This morning, the Guinness and Johnnie Walker maker cut full-year 2026 guidance for the second time in three months, with organic net sales expected to fall by 2%-3%. Strong growth in Europe, Latin America and Africa was more than offset by sluggish US sales, where cash-strapped consumers are trading trade down from Diageo’s premium brands to cheaper alternatives. Chinese white spirits also continued to struggle.
Net sales fell 4% to $10.5bn in the six months to 31 December. Adjusted operating profit slipped 2.8% to $3.3bn. For me, the killer blow was news that Diageo slashed its dividend in half, from 40.5 US cents per share to 20 cents.
That’s a real blow, especially as the shares had started to stir, rising around 10% over the last month. Now they’re down 15% over one year and a painful 48% over three.
Dave Lewis must turn this stock around
I suspected the first results under new CEO Dave Lewis might prove sticky. Lewis is best known for his turnaround at Tesco. He began there with a bout of so-called kitchen sinking, getting the bad news out early to reset expectations. I wondered if he might try something similar here. To a degree, he has.
I’m deeply disappointed by the dividend cut. The one consolation of a falling share price was the prospect of a higher yield, which was nearing 5%. Now we’re back around the old 2%. Lewis will have to justify that sacrifice by delivering bags of growth, and hiking the dividend when the good times return. Assuming they do.
He insists he already sees significant opportunities to act more decisively, sharpen competitiveness and broaden the portfolio to drive higher growth. Savings from slashing the dividend will strengthen the balance sheet and boost financial flexibility. Let’s hope he’s right.
Diageo shares now trade on a price-to-earnings ratio of 15.4. That looks good value, but then again it’s looked good value for sometime, and the news keeps getting worse. There may be more painful days ahead, and the lower dividend won’t ease the pain. But for long-term investors willing to sit tight, I still believe Diageo is worth considering. Let’s hope one day I’m proved right.
