It was going fairly well for Diageo‘s (LSE:DGE) shares at the start of 2026. But it’s been downhill since the FTSE 100 firm slashed its profit forecasts (and its dividend) last week. Military conflict in the Middle East hasn’t exactly boosted investor thirst for the Guinness maker.
It’s now down 3% since 1 January, and on a 12-month basis has dropped 28% in value. But there’s good news too as there’s now potentially greater rebound potential for the share price, if analyst forecasts are to be believed.
Twenty-one City brokers have ratings on the company. Their average share price target for the next year is £19.82 per share, suggesting a 27% uplift from current levels. With expected dividends thrown in, a £20,000 investment here today could be worth £26,086 a year from today.
While market conditions remain tough, I’m optimistic Diageo shares could have bottomed out, leaving room for healthy gains from this point.
Why the bullishness?
As a Diageo investor myself, I was pleased to see the company cut dividends and reduce profit forecasts to more realistic levels. With the new chief executive Dave Lewis having done the necessary ‘weeding,’ I’m hoping the chances of further bad news emerging has been eliminated. Cutting the steady ‘drip, drip’ of disappointment is critical in repairing market confidence.
I’m not saying the drinks giant’s out of the woods. Consumer spending remains challenged in key markets like the US. It also has to adapt to a broader fall in alcohol consumption in the West, a task that won’t be easy. Organic net sales dropped 2.8% in the six months to December.
But I believe things could get better from here. Broader retail sales are accelerating in North America, Europe and Asia as confidence improves, and further interest rate cuts could keep this run going. Encouragingly, Diageo reported “strong” sales growth in its European, African and Latin American and Caribbean markets between July and December, suggesting early green shoots of recovery.
The company’s also eyeing a bigger slice of the ready-to-drink (RTD) segment, where convenience and lighter alcohol options are driving demand. It also has considerable potential with no-alcohol drinks, a category in which it’s already enjoyed brilliant success. Its Guinness 0.0 variant has sold extremely well, and Diageo’s hiking production capacity to meet demand.
Are Diageo shares a buy?
With its new CEO poised to turbocharge cost-cutting and a pullback in under-delivering premium categories likely, I’m hopeful sales and earnings will recover strongly from this point.
But what might this mean for Diageo’s bombed-out share price? Given how cheap the company currently is, I believe there’s ample scope for a price rebound. Today it trades on a forward price-to-earnings (P/E) ratio of 14.1 times. That’s significantly below the long-term average of 21-22.
In my view, Diageo is a classic high-risk, high-reward share for investors to consider. At current prices, I think it’s worth a serious look.
