Down another 15% in September! Is Diageo now the best share to buy or the very worst?

At the end of every month I check out the worst performer on the FTSE 100, and ask myself if it’s the best share to buy in the month ahead. As a contrarian investor, I like picking up bargains. But this approach can also be risky as troubled stocks can take a long time to turn around. Some never get there.

I was dismayed to discover that September’s worst performer is a stock I hold in my Self-Invested Personal Pension: spirits giant Diageo (LSE: DGE). It fell another 15% over the month and is now down 33% over 12 months and 55% over three years. There was no major company news in September, it just seems that investors are losing hope.

Fallen star

I remember when Diageo looked like a no-brainer buy-and-hold, with a portfolio of world-famous brands such as Johnnie Walker, Guinness, Baileys, Smirnoff and Captain Morgan. It still has those brands (and many more) but it’s been hammered by the cost-of-living squeeze, US tariffs and the trend among younger people to drink less.

Even those who bought after the first profit warning in late 2023 are hurting, as the stock slides and slides. Diageo still throws off plenty of cash, but share price growth is proving elusive.

Pressure on margins

Dividends have held up. The trailing yield has now climbed to 4.45%, and forecasts suggest something similar in the next couple of years. That’s twice as high as it was in Diageo’s glory growth era.

Debt of around £16bn looks chunky against today’s shrunken £39bn market cap. On 5 August, we learned that full-year operating profits had plunged 27.8% to $4.33bn, worsened by impairment charges and adverse currency swings. However, free cash flow did jump 17.6% to $2.74bn.

The price-to-earnings ratio is now below 15, compared to the mid-20s it often commanded in the past. That could tempt bargain hunters who value its brands and cash flow, and see this as a cyclical downswing that will be reversed in due course. But the business still has a lot to prove before sentiment shifts.

Recovery potential?

Broker forecasts are more optimistic than I am. The median one-year analyst target is 2,348p, which would mark an impressive 33% recovery from today’s 1,820p, with dividends on top. That feels a little bit like wishful thinking given the challenges facing the business. And I bet many of those forecasts were made before the September drop.

It’s darkest before the dawn and there’s brilliant comeback potential if Diageo can steady the ship. But with drinking habits changing and the global economy still weak, we can’t assume it will regain its former fizz any time soon. I’m still holding my shares, but it’s painful. After almost two years, I’d need a major rally just to break even.

I think investors might consider buying at this level, but only if they accept the Diageo share price could easily fall further. Is it the best share to consider or the worst? Who knows. It now looks suspiciously like a falling knife. I can see plenty more promising FTSE 100 shares to buy in October, and will focus my efforts on them.