Prediction: in 12 months the smashed up Diageo share price could transform £10,000 into…

The Diageo (LSE: DGE) share price has taken one knock after another. It’s down 25% over the last 12 months, and 47% over three years.

That’s a brutal beating for a stock I’ve regularly seen listed as one of the best UK blue-chips of them all. It shows no business can take success for granted, even one that sells something that’s always in demand, like alcohol.

Painful profit warning

Diageo should have had further protection due to its global reach, given it sells its brands in nearly 180 countries. The downside is that one struggling region can drag down the whole business. Diageo’s hangover started with a profit warning in November 2023, after a slump in Latin American and Caribbean sales.

Another strength turned into weakness. Diageo was praised for its tilt at the premium spirits market, but it’s backfired as cash-strapped drinkers trade down.

Guinness is doing well, but it isn’t enough to drown out signs that younger people are drinking less and might keep doing so, whether for health, cost, or cultural reasons. Slowing sales in China, the US and Europe haven’t helped.

To round things off, Diageo’s been caught up in Donald Trump’s tariff war, which instantly threatened its Mexican tequila and Canadian whisky brands.

FTSE 100 recovery stock?

The board’s fighting back. On 19 May, it announced a $3bn-a-year cashflow improvement plan alongside a new push to cut $500m in costs over three years.

Organic net sales rose 5.9% in the three months to 31 March, up from just 1% in the first half. But even that was flattered by one-off phasing benefits, expected to reverse in the current quarter.

Asia remains a problem, with “consumer downtrading” hurting both Johnnie Walker and Guinness. The board also warned of a $150m tariff hit to profits. It reckons it can absorb about half of that through cost-cutting, but the rest could take time.

Chief executive Debra Crew insists the long-term outlook for spirits remains attractive. We’ll see.

Dividend makes waiting easier

I bought in too early and I’m sitting on a 30% loss. That’s painful, and it’s tested my patience.

However, the shares now look relatively cheap, with a price-to-earnings ratio of 14.8, well below the 22-23 times earnings it commanded in the past. I’ve thrown enough money at the stock, but others might consider buying Diageo at these levels. They might need a stiff drink while they wait for better days.

There’s some optimism out there. The 21 analysts offering one-year share price forecasts produce a median target of 2,419p. That’s a rise of 27% from today’s levels.

That’s not the only potential reward. The dividend yield‘s crept over 4%, comfortably above its traditional 2-3% range. That could deliver a total return of more than 30%, which would turn £10,000 into around £13,000. I’d certainly raise a glass to that.

I’ll keep holding for now. I still believe Diageo has what it takes to get through this rough patch. The next big test is when it publishes its preliminary results on 5 August. Let’s hope we get something stronger this time. But I suspect we may have longer to wait.

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Harvey Jones has positions in Diageo Plc. The Motley Fool UK has recommended Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.