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It didn’t last long, did it? The latest rally in Diageo (LSE:DGE)’s share price was a sign that many investors see it as an overvalued asset that is ready for a pullback. That was until Wednesday (25 February), when the drinks giant released results for the six months ended 31 December 2025 (H1 FY26). Its shares closed the day 12.7% lower.
But does this mean that it is now less money? Let’s take a closer look.
A false dawn
From 7 January to 24 February, Diageo’s share price increased by 18.8%. After a long period in the doldrums, investors seem to be warming up to stocks again.
Perhaps you were interested in the appointment of Sir Dave Lewis, earlier Unilever again Tescowho has earned a reputation as a reformer? ‘Drastic Dave’ took over as CEO at the beginning of the year, so he is not responsible for what happens in 2025.
However, investors appeared disappointed with the 2.5% decline in adjusted earnings per share compared to H1 FY25. And a reduction of 50.6% in the temporary share “at the right level to accelerate balance sheet consolidation and create more financial flexibility” probably didn’t help their attitude.
What’s going on?
Go deeper and the results paint a confused picture.
If you look at the change in organic net sales it shows that there is no discernible pattern except for Africa which continues to perform well. Those hoping for green shoots will likely be disappointed.
However, based on adjusted earnings per share for the 12 months to 31 December 2025 (119.3p at current exchange rates), the stock is now (27 February), trading at a multiple of 13.3 earnings.
Compared to recent history and others in the industry, this is incredibly cheap. In context, as the world emerged from the pandemic, Diageo had a price-to-earnings (P/E) ratio of over 30.
| Fiscal year | Share the price (pence) | Earnings per share (pence) | Price-to-earnings ratio |
|---|---|---|---|
| 30.6.21 | 3,461 | 117.3 | 29.5 |
| 30.6.22 | 3,531 | 149.2 | 23.7 |
| 30.6.23 | 3,379 | 145.2 | 23.3 |
| 30.6.24 | 2,489 | 132.7 | 18.8 |
| 30.6.25 | 1,828 | 121.3 | 15.1 |
But business was booming at the time. Now, it is decreasing. And unless it can reverse this trend, the P/E ratio is irrelevant.
A challenging market
Diageo struggles to cope with squeezed consumer incomes and uncertainty over US tariffs. Basically, young people drink less. They also engage in the ‘zebra process’, which involves exchanging alcoholic and non-alcoholic drinks during the night. Weight loss drugs and legal cannabis products are the least of the group’s concerns.
At the beginning of the year, I was confident that the business would start to recover. While I didn’t subscribe to the ‘too big to fail’ theory, I thought its size would give it the financial leverage to turn things around. The group owns some of the biggest brands in the business, in particular Guinnessand has all price points covered in its key markets.
However, now it looks like it will take longer to get back than I originally thought. Diageo’s turnaround strategy was in place long before its new boss arrived on the scene. But it will take Sir Dave to concentrate and cut the dead wood. I think you have the skills to succeed. That’s why I haven’t changed my mind and still think Diageo is a long-term return stock worth considering.
