Is it time to ditch Diageo shares?

Q: I purchased Diageo at 4,000p a share, and the price has fallen below 2,000p since then. Should I make the great British compromise and sell half of my holding?

A: Many investors will share your pain. Timing the market is notoriously difficult, and companies can go from hero to zero very quickly. To answer your question, it’s necessary to consider two things. First: can Diageo’s share price recover? And second: how do you strike the right balance between damage control and opportunity cost?

Let’s start with Diageo itself. The FTSE 100 drinks company - which owns brands like Guinness, Smirnoff and Tanqueray - had an excellent run between September 2020 and September 2022. During the pandemic, people splashed out on premium spirits which drove up its sales and its share price. Things improved further when pubs and restaurants reopened after the first Covid lockdown.

When the cost of living crisis hit, however, customers started to tighten their belts and the market started fretting about demand. A profit warning arrived in late 2023 and, in 2024, revenue declined for the first time in four years. In February this year, Diageo also scrapped its medium-term growth targets, citing tariffs and geopolitical uncertainty.¹

Glass half full

The key question for shareholders is whether the group’s problems are cyclical or structural. In other words, can it bounce back or does it risk permanent decline?

Some of Britain’s best-known fund managers are divided on this.

Nick Train, manager of the Finsbury Growth & Income Trust, is optimistic. Diageo is the sixth biggest holding in his portfolio and - although the big fall in share price has ‘tested his equanimity’ - Train still believes Diageo has “unique and valuable assets”.²

Diageo’s past performance is certainly comforting: since the turn of the century, it has delivered an average total return of nearly 9% a year. Under a new management team, the group is also striving to cut $500m in costs and reduce its huge debt pile, helped by some chunky disposals.

This has caused analysts at investment bank Jefferies to feel bullish. “Diageo will start to look different as confidence in spirits growth increases and under a new heavyweight CFO, where we see a renewed focus on growth, profit and cash,” they concluded.³

Glass half empty

However, some investors are worried that Diageo is facing serious structural challenges.
 
Terry Smith, of Fundsmith Equity fame, sold his stake in Diageo last year. He told investors in his annual letter that “we suspect the entire drinks sector is in the early stages of being impacted negatively by weight loss drugs. Indeed, it seems likely that the drugs will eventually be used to treat alcoholism such is their effect on consumption”.⁴

Weight-loss drugs are not the only concern. Research shows that people are generally drinking less than before - particularly Gen Zs. Over a quarter of today’s 18 to 24-year-olds never drink alcohol, according to research by Drinkaware, versus 12% of 45 to 54-year-olds. ⁵

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.