Why is Diageo’s share price falling?

Home > Analysis > Why is Diageo’s share price falling?

Diageo is one of the largest drinks and spirits companies in the world, as a market cap of £52.0 billion and 27,000 employees attest. The group has annual sales of £14.0 billion and gross profit margins of just under 22.0%. But, the Diageo share price has been experiencing some tough times recently.

Diageo issued a profit warning back in November when it said that it was seeing slowing and in some cases negative growth in key markets.

In Latin America and the Caribbean, which the company refers to as LAC,  and which accounts for 11.0% of Diageo’s total revenues, net organic sales were forecast to decline by -20.0% year over year.

However, interim results released this week showed that sales in LAC had declined by -23.0%.

Diageo believes that it can mitigate the knock-on effects of this fall in sales, through an inventory reduction. And to be fair to the company excluding LAC, they grew operating profits by+ $29.0 million or +0.90%.

Is it worth buying Diageo for it’s dividends?

The company also took the opportunity to announce a +5.0% increase in its interim dividend, taking it to 40.50 cents

Diageo has paid a dividend for at least the last 24 years, and it has a 15-year compound dividend growth record of +5.80%.

The dividend growth rate dipped into the pandemic, but it has been climbing once more since the end of lockdown.

Diageo has a payout ratio of 47.23% and a dividend cover ratio of around 1.90 times, according to data from Dividendmax.com. These figures suggest that despite the fall in sales in Latin America the dividend is not under threat.

What is the stock price forecast for Diageo?

In the last 6 months, Diageo’s stock price has fallen by a little over -20.0%, and over a two-year time frame, it’s down by -26.00%.

The two-year high for the stock is up at £40.67 but the chances of getting back there in a hurry look limited, not least because the shares have printed a new low, roughly once every two weeks, over the last year.

City analysts have a £37.40 target price that’s some £10.00 or 35.0% above the current share price of £27.54. The consensus recommendation on the stock is a hold.

Is Diageo undervalued?

Diageo sits on a forward PE ratio of 18.90 times, and whilst that’s not excessive when compared to international peers such as Brown Forman Inc and Remy Cointreau.

It’s hard to make a case for them reaching the city’s target price in the face of declining sales, an ongoing cost of living crisis and the firm’s 5-year revenue and earnings growth rates, which are split on either side of 7.0%.

Diageo hasn’t traded above its 200-day moving average since April last year, and in truth, it hasn’t spent any real-time above the moving average since September 2022.

That moving average is currently found at £31.76.

US broker Jefferies published an update on the stock after the interim results in which it highlighted underperformance on some metrics in Europe, North America and of course LAC, on the upside Africa outperformed.

Diageo could only be considered undervalued if its underlying markets start to pick up, and management can achieve efficiencies through inventory control and other cost-cutting measures.

The dividend is secure for now and the group’s strong cash flow should provide comfort for pure income investors.

Scroll to Top