The Diageo (LSE: DGE) share price has started 2025 the way it ended 2024 (and 2022 and 2023). Down!
Admittedly, we’re only two weeks into the New Year, but it’s not a great start. Shares of the premium spirits powerhouse are down 5%. With the FTSE 100 index off to a flyer this year, up nearly 4% already and just hitting a fresh record, Diageo shareholders like myself are left frustrated once again.
What’s going on here? And should I ring the bell and announce closing time on this stock? Let’s take a look.
Drip-drip of downbeat developments
There hasn’t been any single update that has sent the stock lower. Instead, there has been a steady stream of negative news and nothing good to counter it.
Last week, for example, we learned why fund manager Terry Smith dumped Diageo shares last year. He lost faith in the new management team after the build-up of unsold booze in Latin America, while also fearing GLP-1 weight-loss drugs like Wegovy were about to negatively impact the drinks industry.
We suspect the entire drinks sector is in the early stages of being impacted negatively by weight-loss drugs. Indeed, it seems likely that the drugs will eventually be used to treat alcoholism such is their effect on consumption.
Terry Smith, Fundsmith Equity Fund annual letter to shareholders, 2024
However, Fundsmith’s sale was back in the summer and the market has known about the lurking GLP-1 drugs issue for a while. So these are unlikely to be the sole reasons for the stock’s weakness this year.
Another negative development was that India’s federal investigating agency has alleged that Diageo made suspicious payments to a politician’s firm in order to attain favourable government decisions. We don’t know when this allegedly happened and Diageo said it’s cooperating with the agency. India is massive and likely to be an important growth market for it over the long term, so this news wasn’t welcome.
Earlier this month, US Surgeon General Vivek Murthy called for alcoholic drinks to carry cancer warning labels like cigarettes. It’s unclear whether this will be implemented, but some analysts fear alcohol firms might be heading the way of tobacco stocks — slow growth, declining customer base, higher regulation, and lower valuations.
Finally, there’s the looming threat of soon-to-be- President Trump’s tariffs, which could take a bite out of Diageo’s profits. It exports a load of Canadian whisky and Mexican tequila into America each year. So it’s in the firing line.
Should I throw in the towel?
The stock looks decent value, trading at 16.5 times forecast earnings for FY26 (starting July). The forward dividend yield is now approaching 4%, so perhaps there’s something in the tobacco stock comparisons. They’re bought primarily for the income rather than any expectations of long-term industry growth.
Diageo is due to report H1 2025 results in February, and one of my biggest fears is hearing management utter those dreaded words: GLP-1. If it says these are indeed having an impact, the stock would likely be crushed.
Still, I’m keeping hold of my shares and hoping for green shoots of recovery in the global drinks market, or at least something to be optimistic about. I get enough doom and gloom from the news — I don’t need any more in my portfolio!
