Are Diageo shares turning into the next British American Tobacco?

My Diageo (LSE: DGE) shares are a disaster. They’re down 25% over the past 12 months and 50% across three years. That’s a woeful performance from what was once considered one of the most reliable UK blue-chips.

I bought Diageo shortly after its first profit warning in November 2023, when sales and stocking issues flared up in Latin America and the Caribbean. I thought the dip was just a blip and I was snapping up a bargain. Today, it’s one of the biggest losers in my Self-Invested Personal Portfolio (SIPP). The shares have tumbled another 8% in the last week alone.

FTSE 100 hero turned zero

Plenty of short-term issues are dragging the business down. The cost-of-living crisis has taken a toll on demand for Diageo’s premium spirits range. Its high-end strategy looked a winner once, less so now. Tariffs are another drag, hitting exports of Canadian whisky and Mexican tequila. These issues may resolve in time, but what worries me more are two possible long-term threats.

First, young people are drinking less. That may just reflect tighter budgets, but there’s a real possibility it’s a generational shift, with health concerns keeping alcohol off the menu. Younger drinkers do seem to have developed a taste for Guinness though, now a key Diageo brand.

Second, the rise of weight-loss drugs such as Wegovy. Some experts think they’ll become as commonplace as statins, prescribed to millions. They not only suppress appetite for food, but can dull the taste for alcohol too. Neither of these factors crossed my mind when I bought the stock, but weigh heavily on me now.

Despite all the gloom, Diageo isn’t in freefall. Its 2025 preliminary results, published on 5 August, showed organic net sales of $20.2bn, down just 0.1% and that’s partly due to currency effects and disposals. Free cash flow climbed from $2.33bn to $2.74bn. Management anticipates $3bn in 2026.

Tobacco stocks survived

That made me wonder if Diageo could follow a similar path to the big cigarette makers. British American Tobacco has been hit by health fears and declining consumption for decades, yet talk of its demise proved premature. Instead, investors view at as a dividend machine. Its trailing yield is 5.7% (it was above 8% not long ago) and the share price is up 40% over 12 months. It has kept the cash flowing by grabbing more share of a shrinking market and moving into new areas like vaping.

Alcohol may follow the same script. Some consumers will cut back, but others will stay loyal. Diageo may deliver less growth, but the income could compensate. The foundations are already there. Its dividend yield has doubled from 2% to just over 4% in the last couple of years.

It’s only a theory, but I can’t dismiss the idea that the drinks giant could behave more like a tobacco stock. For now, I’d say investors should consider treating Diageo with caution. But with a long-term view, it could still deliver strong returns. Even if it does so in a very different way to the Diageo of old.

The post Are Diageo shares turning into the next British American Tobacco? appeared first on The Motley Fool UK.

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Harvey Jones has positions in Diageo Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.

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