Key Takeaways
- Diageo’s stock price fell sharply on Feb. 25 after it slashed its dividend and forward guidance for 2026.
- Morningstar analyst Verushka Shetty says a reset is now underway under new CEO Dave Lewis
- Fund managers say the stock is an attractive value opportunity given its share price fall and global portfolio of assets.
Diageo DGE stock suffered its worst ever day of trading on Feb. 25 after a sobering set of results made clear the size of the challenge awaiting new CEO Sir Dave Lewis. The one-day move erased almost all of the gains seen so far in 2026, reversing hopes of a potential recovery after a weak 2025.
In his first earnings report since taking the role on Jan. 1, Lewis cut financial forecasts and halved Diageo’s dividend after continued weakness in the US and China weighed on sales.
Net sales and underlying operating profit were both down 2.8%, while volumes and average selling prices also fell.
In response, Diageo shares were down around 13% by the close on Feb. 25, marking the worst single trading day for the company since it was created through the merger of Guinness and Grand Metropolitan in 1997.
Despite the worse-than-expected results, Morningstar analyst Verushka Shetty says a reset is now underway with Lewis at the helm.
What Can Investors Expect From the New Diageo CEO?
Known for his successful turnaround of UK supermarket giant Tesco in the 2010s, Lewis took up the Diageo role following a period of instability at the top, which saw Debra Crew exit last summer after just two years.
During his time at Tesco, Lewis earned the nickname “Drastic Dave” for his cost-cutting initiatives.
Will Bradwell, portfolio manager on the Morningstar Silver-rated Clearbridge UK Equity Income fund, says Lewis’s track record at Tesco suggests he has the “right toolkit” to take on a similar turnaround mission at Diageo.
Bradwell says Lewis may revisit Diageo’s core ‘premiumization’ strategy, which focuses on higher quality spirits to capture growth.
Determining the future of this strategy will be key for Lewis moving forward, says Bradwell, with growth currently being seen in cheaper, ready-to-drink alcohol products.
“The update all seems sensible to us. Investors want to see the business return to growth and the results acted as a staging post for Dave Lewis to show how they can achieve this.”
Diageo Share Price Snapshot
- Current price: £16.40
- 1-year performance: –27%
- Discount to fair value: 23%
- Forward P/E: ~11x
- Dividend yield (forward): ~4–5%
Following the results, Lewis highlighted underdevelopment in the ready-to-drink category as a challenge facing the firm, while he also promised to address Guinness capacity constraints which have seen shortages of the stout in London.
Morningstar’s Shetty expects improving these areas and reducing debt will be prioritized in the near term.
She also notes Diageo is likely to offload noncore assets such as the Royal Challengers Bangalore cricket team, in which Diageo holds an estimated USD 2 billion stake. The former Tesco CEO has form here, his transformation plan for the UK supermarket included business disposals and the removal of management layers.
While this week’s results come only seven weeks into his tenure, Lewis said he can already see “significant opportunities” for Diageo to act more decisively, including price repositioning.
Further detail of his plans are expected in the summer, though Diageo already initiated a cost-cutting initiative prior to his arrival, which targets USD 625 million in savings by the 2027/28 fiscal year.
Why Has Diageo Stock Struggled?
Diageo is not alone in its struggles, with the wider drinks sector facing a downturn as higher inflation over the last five years has hit consumer wallets, prompting customers to opt for cheaper products. In February earnings, Pernod Ricard also reported weakness in the US and China.
Younger generations also continue to drink less than their predecessors, surveys show: Gen Z consumes 20% less alcohol than millennials, according to Morningstar’s Shetty.
The impact of GLP-1 weight loss drugs on alcohol consumption has also been cited as a factor in the slump in Diageo’s key US market.
In the earnings call, Lewis said tighter consumer spending was “by far and away” the biggest challenge for Diageo.
However, Morningstar analysts view this headwind as cyclical, while Shetty says its broad portfolio and geographic diversification will enable it to withstand industry shifts.
Diageo counts spirit brands including Smirnoff, Johnnie Walker and Tanqueray among its global portfolio. In beer, Guinness was a bright spot as it recorded another period of strong revenue growth.
Morningstar analysts rate Diageo stock as undervalued, despite cutting its fair value estimate 5% following the results. The new fair value estimate is £21.40, above the current price of £16.40 a share, with the stock trading in 4-star territory. Diageo retains a wide economic moat.
Is Diageo Stock a Buy After the 13% Drop?
While the consumption issue is likely to continue, according to TM Brickwood UK Value manager Ben Whitmore, the main tailwind for the stock is likely to be the expected reinvigoration under Lewis.
“Combined with a low valuation for the business, this makes for an attractive investment opportunity,” he says.
“On some measures, such as the cyclically adjusted price earnings yield and free cash flow yield, Diageo is cheaper or similarly valued to British American Tobacco. This is very unusual.”
First Eagle Investors deputy head of global value Julien Albertini, who also holds the stock, argues the headwinds are largely priced in, saying the “great moderation” is not necessarily lethal to Diageo or the industry.
“At the same time, the very high inflation we’ve seen is definitely impacting behavior. We also saw a massive spike in alcohol consumption during the covid era and significant overstocking, and I think that destocking is still working its way through.”
Despite the company’s struggles, Albertini says there could be better days ahead for Diageo. The spirits sector has a high barrier to entry, leaving Diageo in a good spot to capitalize on a pickup in spending.
“You’re not competing with private label in the way you do in other consumer staple categories. That translates into attractive economics for great brands—high gross margins and very healthy operating margins.
“If you go back four or five years, Diageo was regarded as one of the best consumer companies in the world, and now we’re talking about what’s going wrong with it.
“[However] I think it remains a structurally attractive industry, and within that industry, Diageo is very well positioned.”
