Factors Driving Diageo’s Share Price (LON: DGE)

Diageo (LON: DGE), the global spirits giant behind brands like Johnnie Walker, Guinness, and Smirnoff, is facing a period of significant turbulence. The company's stock has been on a downward trajectory for the past year, shedding over 27% of its value and leaving investors questioning the near-term outlook for the alcoholic beverage behemoth.

Moving into the afternoon session, Diageo shares are trading at 2,090.5 GBX, a slight increase of 0.73% but hovering near its 52-week low.

Factors Influencing the Stock Price

The recent decline is multi-faceted. A broader market downturn and concerns about consumer spending in the face of persistent inflation have undoubtedly played a role. However, Diageo-specific issues are also weighing heavily on investor sentiment.

• Conflicting Technicals: There's a sell signal from a rectangle formation, suggesting further potential decline. The stock has however just breached the 200 day moving average, indicating a potential uptrend.
• US Tariffs: A significant factor affecting Diageo's outlook is the potential for increased US tariffs. This is particularly relevant to their Canadian whisky and tequila portfolios. Diageo is making contingency plans, including pricing adjustments, inventory management, and supply chain optimization.
• Analyst Ratings: Deutsche Bank upgraded Diageo to ‘hold' from ‘sell', with a price target of 2,020p.
• Weak Demand: Diageo removed its medium-term guidance due to weak demand in key markets and foreign exchange impacts.

Financial Performance (Half-Year to Dec 31, 2024)

The company's recent half-year earnings report revealed a concerning picture. While organic net sales returned to growth with an increase of 1%, reported net sales of $10.9 billion declined 0.6% due to unfavorable foreign exchange. More worryingly, pre-tax profit decreased by 9.9% to $2.77 billion.

• Pretax profit decreased by 9.9% to $2.77 billion.
• Net sales were down 0.6% to $10.90 billion, attributed to unfavorable foreign exchange, though organic sales grew by 1.0%.
• Performance varied across regions, with flat sales in North America, growth in Europe, and declines in Asia Pacific, Latin America & Caribbean, and Africa.

This uneven performance highlights the complex global landscape Diageo operates in, where shifting consumer preferences, economic pressures, and geopolitical risks all play a significant role.

Company Strategy and Outlook

Despite these challenges, Diageo's management remains publicly optimistic about the long-term.

• No/Low Alcohol Opportunity: CEO Debra Crew highlighted the significant opportunity in the no- and low-alcohol category, with Diageo's non-alcoholic portfolio up by approximately 56%. They are focusing on the “zebra striping” trend.
• India Leadership Change: Praveen Someshwar was appointed as CEO-Designate of Diageo India and will take over on April 1, 2025.
• Focus on Resilience: Diageo is focused on operational excellence, productivity, and strategic investments to gain market share.
• Consumer Caution: Crew has acknowledged the challenging global environment, stating that it is “hard to call” when the company will meet its medium-term sales target.
• Long-Term Confidence: Despite current challenges, Diageo's leadership remains confident in the long-term growth potential of the spirits industry.

Dividend Information:

• An interim dividend of 0.41 was declared.
• Ex-Dividend Date: February 27, 2025.
• Payment Date is April 24, 2025.

Diageo's current dividend yield of 3.82% offers some solace to income-seeking investors. Consensus EPS Forecasts are predicting growth over the next few years, with 2027 earnings estimated between 6.88 and 7.43.

Several financial institutions have adjusted their ratings for Diageo. UBS Group has upgraded the company’s rating to “buy,” raising its price target significantly from GBX 2,300 ($29.87) to GBX 2,920 ($37.93). Furthermore, Jefferies Financial Group also upgraded Diageo to a “buy” with a price target of GBX 2,800 ($36.37). However, JPMorgan Chase & Co. maintains a “neutral” rating for Diageo with a price target of GBX 2,500 ($32.47). Currently, Diageo holds a consensus rating of “Hold” with an average price target of GBX 2,876.67 ($37.36).

Ultimately, Diageo finds itself at a crossroads. The near-term headwinds are undeniable. However, Diageo's strong brand portfolio, global reach, and commitment to innovation suggest that it possesses the resources to weather the storm. Whether the current share price represents a buying opportunity or a value trap remains to be seen, and investors should carefully weigh the risks and rewards before making any decisions.