Leading up to 2022, the Diageo (LSE:DGE) share price had glided higher over many years, recovering from every setback to notch new highs. It was driven on by the global spirits premiumisation trend.
Since then though, being a Diageo shareholder has felt less like sipping G&Ts in a trendy Mumbai cocktail bar, and more like nursing a hangover in a dimly-lit pub. The reversal of fortune — the stock is down 55% in five years — has been quite shocking.
However, sometimes the FTSE 100 stock teases a recovery. Since 1 July, for example, when it closed at 1,483p, Diageo has jumped to 1,639p. A rise of roughly 10.5%.
Is this yet another false start? Or the beginning of something more significant?
Why has Diageo crashed?
The rot set in when consumer demand normalised soon after lockdowns ended, leaving distributors and retailers with far too much stock on their shelves.
Then Diageo issued a shock profit warning in 2023 after sales plummeted in Latin America, where cash-strapped drinkers started trading down to the rough stuff. This made investors question whether management had a grip on things.
Performance since has been more like a flat lager than a champagne fizz. In H1 FY26, organic net sales declined 2.8%, with ongoing weakness in North America and Asia Pacific offsetting growth in Europe, Africa, and Latin America.
As I see it, high inflation since late 2021 has shattered two things underpinning the original Diageo investment case.
First, tapped-out pricing power, because it’s clear now that Diageo cannot regularly raise prices without hurting volume. To address this, the new management team is strategically lowering prices to become more competitive in certain categories.
Second, in hindsight, premiumisation was more of a trend than a permanent structural shift. When inflation hit, consumer behaviour proved to be far more price-sensitive than expected.
The premiumisation trend was built around the idea of ‘drink less, drink better’. Instead, hard-up consumers have preferred to drink less and pay less.
Why’s the stock up 10%?
Recently though, there have been a handful of developments that have boosted the stock. The first is another ceasefire in Iran, which raised hopes that inflation might not rise as much as it would during a protracted conflict.
Meanwhile, Diageo’s Indian unit, United Spirits, recently posted a 51.6% jump in Q1 profits. The world’s fifth-largest economy is still touted as a big growth market for the company’s premium spirits.
Reuters also reported that CEO Dave ‘Drastic’ Lewis is planning to slash headcount by as much as 30% in some Diageo teams. He’s set to flesh out his plans for a turnaround on 6 August, so more investors might be buying shares ahead of that.
I’ve bought shares
July’s gains could quickly reverse if the Iran war restarts and the CEO’s plans fail to convince the market. Therefore, it’s hard to know whether this run has legs.
For the record, I started a position in Diageo recently. The stock is trading cheaply, offering a decent 3.1% dividend, and I’m confident Lewis can rightsize the business, improve the balance sheet, and restore volume growth.
But this is going to take time, meaning the stock is only worth considering for the long haul. In the short term, there’s likely more explosive opportunities elsewhere.
What income stock do we like better than Diageo Plc right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at an income share we think is worth your time.
Ben McPoland owns shares in Diageo.
This story originally appeared on Motley Fool
