Diageo shares just got even cheaper

It might be a ‘dry January’ for Diageo (LSE: DGE) shares. After a brutal few years of decline on the back of worsening growth prospects, the share price has fallen another 13% since November.

The alcoholic drinks seller will be hoping people will enjoy the winter months with its offerings like Guinness, Tanqueray and Smirnoff in hand. But will folks kicking 2026 off with a few drinks be the start of a turnaround for the FTSE 100 drinks giant? Or will abstinence be the watchword for a stock in decline?

Turnaround on?

In gearing up for a turnaround in the company’s fortunes, there was a change of leadership late last year. Out went CEO Debra Crew and into the corner office came former Tesco chief Dave Lewis.

A sign of things to come might be taken from Lewis’s nickname â Drastic Dave. This was a moniker he was awarded while at Unilever after he developed something of a reputation for ruthless cost-cutting.

In his own appointment speech, he said: “The market faces some headwinds but there are also significant opportunities.” This suggests he might be looking to double down on the more profitable parts of the business.

Where might those be? Guinness is one obvious part. The black beer is so popular that many pubs ran out of the stuff the Christmas before last. And speaking of opportunities, the growing ‘sober curious’ crowd are flocking to the no-alcohol Guinness 0.0 version. On a personal note, it’s the only zero alcohol beer I’ve ever tried that actually resembles the real stuff.

A buy?

The headwinds, as Lewis calls them, are worth considering too. The changing consumer tastes away from alcohol are a huge concern for a company that doesn’t sell much else. The great shift away from booze is still in its infancy, but early signs suggest that today’s young adults are drinking less and weight-loss drugs are causing people of all ages to drink much less too.

If people are becoming healthier then that may mean fewer pints and cocktails and a shrinking Diageo bottom line. Investors may wish to be wary of the ethical considerations of investing in such a stock too.

Investors have probably also noticed, amid the tumult, that Diageo had quietly turned into a cheap-looking biggish yielder. The dividend yield has more than doubled, currently standing at 4.94%. That’s forecast to go higher in the years ahead too.

On valuation, Diageo trades at a forward price-to-earnings ratio of just 13. It remains to be seen whether earnings can sustain such a cheap P/E under the new chief’s stewardship.

On the other hand, the latest forecasts do have earnings and revenue to continue rising until 2027. So if it can then we could be looking at something of a bargain. I’d say the stock is worth thinking about.

The post Diageo shares just got even cheaper appeared first on The Motley Fool UK.

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John Fieldsend has positions in Diageo Plc and Tesco Plc. The Motley Fool UK has recommended Diageo Plc, Tesco Plc, and Unilever. 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.