Has Diageo just become one of the best value stocks around?
It didnât last long, did it? The recent rally in the Diageo (LSE:DGE) share price was an indication that many investors saw it as a value stock ready to bounce back. That was until Wednesday (25 February), when the drinks giant released its results for the six months ended 31 December 2025 (H1 FY26). Its shares closed the day 12.7% lower.
But does this mean itâs now a bit of a bargain? Letâs take a closer look.
A false dawn
From 7 January to 24 February, Diageoâs share price increased 18.8%. After a long period in the doldrums, investors seemed to be warming to the stock once more.
Perhaps they were enthused by the appointment of Sir Dave Lewis, previously of Unilever and Tesco, who has earned a reputation for being a bit of a turnaround specialist? âDrastic Daveâ took up his position as chief executive at the start of the year, so heâs not responsible for what happened in 2025.
Even so, investors seemed disappointed by the 2.5% drop in adjusted earnings per share compared to H1 FY25. And the 50.6% cut in the interim dividend âto a more appropriate level to accelerate the strengthening of the balance sheet and create more financial flexibilityâ probably didnât help their mood.
What’s going on?
Delve deeper and the results paint a confused picture.
Looking at the change in organic net sales shows no discernible pattern other than Africa continuing to do well. Those hoping for the green shoots of a recovery are likely to be disappointed.
However, based on adjusted earnings per share over the 12 months to 31 December 2025 (119.3p at current exchange rates), the stockâs now (27 February), trading on an earnings multiple of just 13.3.
Compared to recent history and others in the sector, this is incredibly cheap. For context, as the world emerged from the pandemic, Diageo had a price-to-earnings (P/E) ratio of well over 30.
| Financial year | Share price (pence) | Earnings per share (pence) | Price-to-earnings ratio |
|---|---|---|---|
| 30.6.21 | 3,461 | 117.3 | 29.5 |
| 30.6.22 | 3,531 | 149.2 | 23.7 |
| 30.6.23 | 3,379 | 145.2 | 23.3 |
| 30.6.24 | 2,489 | 132.7 | 18.8 |
| 30.6.25 | 1,828 | 121.3 | 15.1 |
But the business was growing back then. Now, itâs shrinking. And unless it can reverse this trend, the P/E ratio is irrelevant.
A challenging market
Diageoâs struggling to cope with squeezed consumer incomes and uncertainty over US tariffs. More fundamentally, younger people are drinking less. They are also engaging in âzebra stripingâ, which involves alternating between alcoholic and non-alcoholic drinks on a night out. Weight-loss drugs and legal cannabis products are a minor concern for the group.
At the start of the year, I was confident that the business would soon start to recover. Although I didnât subscribe to the âtoo big to failâ theory, I thought its size would give it the financial firepower to turn things around. The group owns some of the biggest brands in the business, most notably Guinness, and it has all price points covered in its key markets.
However, it now looks as though itâs going to take longer to bounce back than I originally thought. Diageoâs turnaround strategy was in play long before its new boss arrived on the scene. But itâs going to take Sir Dave to focus minds and cut out the dead wood. I think he has the skills to succeed. Thatâs why I havenât changed my mind and I still think Diageoâs a long-term recovery stock to consider buying.
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More reading
- Down 25% in a year, hereâs why the Guinness brewer might not be the value share it looks like
- The 3 biggest stinkers in my SIPP plunged again this week â what on earth should I do?
- Should I buy Diageo shares after the 25 February update?
- Should I sell my Diageo shares after the dividend cut?
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James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo Plc, London Stock Exchange Group 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.
