It’s fair to say that I’m unimpressed with my Diageo (LSE: DGE) shares at the moment. Over the last year, they’ve fallen 27%. Over the last three years, they’ve fallen 40% (wiping out all my long-term gains). In short, they stink!
Are they worth holding on to? Let’s discuss.
It’s ugly
There’s no doubt that Diageo is facing a lot of challenges right now.
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For starters, the company has experienced a major slowdown in growth. It has been so slow recently (for the six months ending December 2024 organic sales rose just 1% year on year) that management has scrapped its medium-term goal of 5%-7% annual organic sales growth.
Then there’s the debt pile. This is more of an issue now that growth has slowed. At the end of 2024, the company’s adjusted net debt-to-earnings before interest, tax, depreciation, and amortisation (EBITDA) was 3.1 times – a sharp increase from 2019 when it was 2.3 times. This could potentially result in less dividend growth (note that the recent H1 dividend wasn’t increased).
There are also a lot of concerns about long-term demand for alcohol. Looking ahead, the rise of GLP-1 weight-loss drugs could slow demand significantly. As could the drinking habits of younger generations, who are drinking less. So, the outlook is quite murky.
Adding further complications are tariffs. If US tariffs on Mexico and Canada are implemented in March, Diageo believes it could be looking at a $200m hit to operating profit. The big problem for the group here is tequila (which is a key growth driver for the company). This is made in Mexico and exported to the US.
Overall, the company has a lot to work through.
Taking a long-term view
The thing is, I do believe this company has the potential to turn things around and improve its performance and financials.
Today, it owns many world-class brands such as Johnnie Walker, Tanqueray, Don Julio, and Guinness (which grew 17% in the six months ending December). And it believes that the spirits industry has a long runway for growth.
It also has significant exposure to the world’s emerging markets. Here, incomes are rising and demand for well-known brands is growing.
As for the stock, valuation metrics look quite attractive right now, to my mind.
Currently, Diageo’s price-to-earnings (P/E) ratio is 16 using this financial year’s earnings per share forecast (falling to 15 using next year’s). That’s down from around 25 a few years ago.
Zooming in on the dividend, the yield is near 4%. That’s the highest it has been in a long time (and higher than a lot of savings accounts are paying today).
Given the relatively low valuation and attractive dividend yield, I’m going to hold on to my Diageo shares for now. It may take a while for them to recover but I continue to believe that a recovery is possible.
