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Diageo (LSE:DGE) shares have started 2026 in style. They’re up 12% on a positive note, which is a bit of a relief for distressed investors like me. This latest strength has reduced losses over the past 12 months to 16%.
A person who bought 101 shares in FTSE 100 a company a year ago would have seen the value of their investment drop from £2,173 to £1,823. Shares below £86 would help take the edge off, however.
Although Diageo still faces major challenges, I think we may be seeing the start of a heroic share price recovery. Want to know why?
The problem is threefold
It is important to first understand the causes of Diageo’s recent share price problems.
The slide began in mid-2023, the time when consumers began to feel the pinch. The FTSE business faced weak sales in key markets such as the US, Latin America and parts of Asia, which prompted the company to reduce profit forecasts at times.
But it doesn’t end there. The business owns some of the world’s most famous beverage labels such as Captain Morgan, Smirnoff again Johnny Walker. And over the years alcohol has proved one of the strongest segments of the fast-moving consumer goods sector. This has naturally raised concerns about whether management is up to the task of running Diageo successfully.
Finally, confidence in the wider drinks sector has been dented by a massive increase in weight loss jabs. These drugs curb the desire for alcohol and food, adding to concerns about changing consumer habits. The rise of teetotalism is already a big problem for these companies.
What can cause recurrence?
I’m waiting for the anxiety to end Ozempic and other slimming jabs to continue, although high prices, supply constraints and side effects may limit their uptake. However JP Morgan he still believes that this could be a $200bn market by 2030.
However, I am very hopeful that Diageo can overcome the problem of non-GLP-1 consumers given its good track record of product innovation. Its runaway success Guinness 0.0 alcohol-free alternatives are one of the biggest market news of late, and with Diageo’s huge R&D budgets, it has the potential to turn disruption into opportunity.
Elsewhere, I expect big things from new CEO Sir Dave Lewis on things like product performance and costs. This may ease investors’ fears about the quality of management and its ability to generate future growth. And I think earnings could be higher as falling interest rates around the world support consumer spending and sensitive Asian markets recover from their recent slump.
Bottom line
Diageo’s share price still looks cheap to me, despite a strong start to 2026. At £18, the shares trade at a forward earnings ratio (P/E) of 15.3 times, which is some way below the 10-year average of 21.
I think this may continue to attract the attention of value investors, driving the FTSE company forward. Although not risky, I see Diageo shares as a bargain worth considering today.
