Diageo (LSE:DGE) shares are down 26% over the past 12 months. And that compounds losses over the pervious year. In fact, Diageo, once one of the largest companies on the FTSE 100, has seen its share fall by almost 50% from its highs.
So, clearly an investment made a year ago would have been a losing one, with £10,000 being worth just £7,400 today. However, an investor would have received around £300 in the form of dividends during the period.
What’s behind the pullback?
Diageo shares have struggled recently due to a combination of global economic pressures and shifting consumer behaviors. The cost-of-living crisis, global inflation, and economic downturns have led to a noticeable downgrade from premium spirits, as consumers increasingly opt for cheaper alternatives.
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This trend has been exacerbated by challenges in China, a critical market for growth, as well as the fact that younger generations — notably in the UK — are drinking less alcohol overall, raising concerns about long-term demand. In fact, over a quarter of students don’t drink alcohol, and a further 30% of students drink alcohol less than once a week.
US President Donald Trump hasn’t helped matters. His threats to impose a 200% tariffs on European alcohol exports are a potential challenge to brands like Smirnoff and Baileys. Likewise, tariffs on Mexico and Canada may damage brands like Don Julio. However, UK-made products, and of course, those made in the US, will be exempt from the tariffs.
Diageo is getting cheaper
Tariffs certainly won’t make drinks cheaper, but Diageo stock is more affordable than it used to be. The stock is now trading at 17.4 times forward earnings. That’s down from around 25 times in 2022 when market sentiment was clearly very bullish.
Looking forward, analysts expect earnings to grow at a strong pace over the medium term. The price-to-earnings (P/E) ratio is expected to fall to 15.7 times in 2026 and 14.5 times in 2027.
I think there are several things to unpack here, however. Firstly, the forecast may need adjusting given the threat of Trump’s tariffs. And a dividend-adjusted P/E-to-growth (PEG) ratio still points to a small overvaluation, especially when we include the company’s sizeable net debt.
However, analysts will point to the sheer importance of brand value. I run a small soft drinks company called Sumacqua, and I can attest to the challenges of pitching your product when nobody has heard of you before. That’s not an issue Diageo has. Because people in every corner of the world have heard of Guinness and Johnnie Walker.
The bottom line
Diageo’s shares have flopped due to a mix of market downturns and unforeseen political risks. But that doesn’t mean the business won’t recover in the long run. Its brands remain aspirational in large parts of the world despite Gen Z sticking to the soft stuff. Personally, it’s not a stock I’m particularly interested in buying right now, but I’ll keep watching. Undeniably, it has a very strong moat.
