All too often, the best shares to buy turn out to be the ones that most other investors have given up on.
Over long time periods, even the most successful companies eventually end up falling from grace. And while such drastic sell-offs are usually triggered by justified concerns, the best businesses find a way to bounce back.
Diageo (LSE:DGE) certainly seems to fit in the ‘fallen darling’ category right now. The shares are down just over 30% over the last 12 months, and zooming out to the past five years, the loss is closer to 50%!
While dividends paid along the way have helped ease the pain, such massive drawdowns make it perfectly understandable why sentiment is weak.
So, the question now is this: is Diageo about to bounce back?
An incoming rebound?
As a quick reminder, the multi-year downfall of Diageo came as a result of lacklustre growth, troubling debt, and a lack of strategic vision following the untimely death of long-time CEO Sir Ivan Menezes in 2023.
Despite attempts to right the ship, those efforts have so far proven fruitless. But in 2026, some more drastic decisions have started coming out of the boardroom. Under the new leadership of Sir Dave Lewis, Diageo is seemingly undergoing some radical restructuring.
Its ownership stake in East African Breweries is being sold off later this year for a net proceed of $2.3bn. The firm’s underperforming brands in the Chinese markets are also reported to be under review. And insiders have reported rumours that multiple layers of management are being stripped out.
All the while, the firm’s $625m savings initiative is being accelerated to deliver roughly 50% of this target by June 2026. And the boost to free cash flow is only being amplified by the unpopular decision to essentially cut the dividend in half.
These moves suggest the new CEO is seemingly aiming to transform Diageo into a leaner enterprise focused exclusively on its most popular and thriving brands. It’s a strategy that’s eerily similar to what Tufan Erginbilgic did with Rolls-Royce which, after an initial period of volatility, led to its shares skyrocketing to a new all-time high!
What to watch
Similar strategies don’t guarantee similar outcomes. And corporate restructurings of this scale can backfire due to unexpected internal disruption both operationally and culturally.
There are a lot of things for investors to watch closely in the coming quarters, including sales volumes, cost-cutting efforts, and management communication. But like Rolls-Royce in 2023, the biggest elephant in the room is debt.
With $23.5bn of debts & equivalents on its balance sheet, the firm’s leverage stands at 3.4 times adjusted EBITDA. This leverage is much higher than management’s target range of 2.5 to 3 and is consequently costing the business close to $760m in interest each year.
The justification for cutting the dividend was to free up more capital to pay down debts, so if this leverage doesn’t meaningfully fall, that’s definitely a red flag.
But if the balance does start to improve, and management starts delivering on the other sore spots, a rebound in sentiment and share price doesn’t sound far-fetched. And with Diageo shares priced so cheaply, the risk-to-reward ratio seems to be quite favourable, potentially making Diageo among the best shares to consider buying this month.
