Diageo shares plunge another 7% on painful results – buying opportunity or value trap?
Investors who thought Diageo (LSE: DGE) shares finally ripe for a recovery had a rude wake-up call today (25 February), as interim results for 2026 delivered some very bad news. How long would this take?
I bought shares for myself FTSE 100 winds five times since the start of the deterioration in November 2023, caused by a profit warning as sales in its Latin American and Caribbean markets declined. Despite being one of Britain’s most respected blue chips, a globally diversified operation with a range of fine drinks, the news continues to deteriorate. So is today’s dip the end of the road, or the start of something special?
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A serial FTSE 100 fighter
A word of warning. My glass has always been full of Diageo. Every time shares fell in the last two and a half years, I added another chunk to my SIPP. Today, its glass looks empty. However, I am still tempted.
This morning, i Guinness again Johnny Walker The manufacturer cut full-year 2026 guidance for the second time in three months, with organic net sales expected to decline 2%-3%. Strong growth in Europe, Latin America and Africa was more than offset by sluggish US sales, where captive consumers traded down from Diageo’s premium brands to cheaper alternatives. The Chinese white spirits also continued to struggle.
Total sales fell 4% to $10.5bn in the six months to 31 December. Adjusted operating profit fell 2.8% to $3.3bn. For me, the fatal blow was the news that Diageo cut its dividend in half, from 40.5 US cents per share to 20 cents.
That’s a real blow, especially since the stock had already started to move, up nearly 10% in the past month. Now we are down 15% over one year and pain is 48% over three.
Dave Lewis should change this stock
I suspected that the initial results under new CEO Dave Lewis might prove strong. Lewis is well known for his versatility Tesco. He started there by saying that the kitchen was sinking, breaking the bad news early enough to rearrange expectations. I wondered if he might try the same here. To some extent, he already has.
I am very disappointed with the budget cuts. One consolation for the share price decline was the prospect of higher yields, which were approaching 5%. Now we are back to about 2%. Lewis will have to justify that sacrifice by bringing in pockets of growth, and ride the dividend when the good times return. Assuming they do.
He emphasizes that he sees significant opportunities to work hard, sharpen competition and expand the portfolio to drive growth. Savings from reducing the dividend will strengthen the balance sheet and increase financial flexibility. Let’s hope he’s right.
Diageo shares now trade at a price-to-earnings ratio of 15.4. That looks like a good price, but it also looks like a good price for a while, and the news just keeps getting worse. There may be more painful days ahead, and lower profits will not ease the pain. But for long-term investors willing to stay strong, I still believe Diageo is worth considering. Let’s hope one day I will be proven right.
