Should I boot woeful Diageo shares out of my SIPP?
Poor Diageo (LSE: DGE) shares. The FTSE 100 spirits giant used to look impregnable with a simply unmatchable array of global brands, from Johnnie Walker to Gordonâs, Smirnoff, and Baileys. And, of course, it owns Guinness, which recently became the coolest drink in the world after influencers decided no selfie was complete without a pint of the black stuff in hand.
Despite these advantages the Diageo share price has slumped 46% over three years and 18% in the past 12 months. My Self-Invested Personal Pension (SIPP) has been left nursing a serious hangover, with little sign of the headache easing.
FTSE 100 growth shocker
Other out-of-favour consumer stocks in my SIPP have shown flashes of recovery lately, notably Burberry, JD Sports, and Ocado Group. Diageo has not. Is it time to cut my losses?
The group’s troubles can be traced back to November 2023 when it shocked markets with a profit warning linked to weaker sales in Latin America and a build-up of unsold stock.
That wasn’t a one-off issue. On 5 August, the group reported a 28% drop in annual operating profit to £3.8bn. CEO Debra Crew stepped down after less than two years in charge, and Diageo needs to find a permanent replacement. It also needs to locate its lost mojo.
Tariffs add to the woes. Diageo expects a $200m annual hit from new US levies on spirits. It’s trying to mitigate the blow with âinventory management, supply chain optimisation and reallocation of investmentsâ, while hiking its cost-cutting target from £500m to £625m. It’s not all doom and gloom though. It did generate $2.74bn of free cash flow this year, and expects $3bn in 2026.
Sober market mood
Investors have punished the stock. Diageo shares are now back to 2015 levels and there are long-term concerns too. Younger drinkers are cutting back, whether for health reasons, affordability, or as a strange form of rebellion. This undermines the traditional view of alcohol stocks as a defensive consumer staple.
In a rare positive, Goldman Sachs recently lifted its rating in August from Sell to Neutral, suggesting there’s limited downside from here. It didn’t call the stock a Buy, though. I’m not sure I would either.
Long-term investment
Diageo trades at a price-to-earnings ratio of 16.9, which is a lot cheaper than it used to be, but doesn’t exactly cry screaming bargain to me. The trailing yield is 3.75%. Which is okay.
Consensus forecasts produce a one-year price target of 2,329p. That imples growth of almost 12% from today. Throw in the dividend and investors could see a total return of 15%. I’d take that.
I’m personally down 30% and getting itchy feet. However, selling now risks missing out on the recovery, if we get one. I typically buy shares with a minimum five-year of view, so I’ll continue holding for now. Diageo may never be the force it once was, yet it only takes one set of expectation-beating results to spark a revival. Investors might consider buying if they believe in the long-term drinks story.
For now, I’ll keep the stock in my SIPP. I’m betting that by taking the long-term approach, I will eventually toast a recovery. So far, it’s been a losing bet.
The post Should I boot woeful Diageo shares out of my SIPP? appeared first on The Motley Fool UK.
Should you invest £1,000 in Rolls Royce right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls Royce made the list?
More reading
- Warren Buffett holds just a single FTSE 100 stock and it looks cheap
- Down 50%, is this the most discounted FTSE 100 stock?
- Prediction: in 12 months Glencore and Diageo shares could turn £10,000 intoâ¦
- Has Diageoâs share price finally turned a corner (for the better this time)?
- Which FTSE 100 stock will be the next comeback king?
Harvey Jones has positions in Burberry Group Plc, Diageo Plc, JD Sports Fashion, and Ocado Group Plc. The Motley Fool UK has recommended Burberry Group Plc and 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.
