Down 29%, are Diageo shares — and their 4.4% dividend yield — worth the risk?

Diageo (LSE:DGE) shares have performed terribly in recent years. From being one of the most valuable companies on the FTSE 100, it has truly been left behind.

At its peak, the stock was valued at more than double Lloyds. Today it’s worth less than half of the blue-chip banking group. It should be a lesson in caution for investors drawn in by momentum but dwindling fundamentals.

Diageo’s share price decline reflects both lingering hangovers from a weak 2024 and the modest tone of its 2025 results.

Last year, the drinks giant issued a profit warning after demand slumped in Latin America and the Caribbean — a region that had previously driven much of its growth.

Consumer downtrading and excess distributor stock severely hit sales, and the group’s shares have yet to recover.

In 2025, performance stabilised but remained subdued. Organic net sales rose 1.7%, evenly split between volume and price/mix, supported by standout brands such as Don Julio, Guinness and Crown Royal Blackberry.

However, reported operating profit fell 27.8% owing to impairment and restructuring charges, while underlying operating profit slipped 0.7% and margins narrowed 68 basis points as overhead costs rose. None of this is good.

Although Diageo has lifted its cost-savings target to $625m and expects $3bn of free cash flow in 2026, ongoing macroeconomic pressure and muted spirits demand continue to weigh on sentiment.

But is it a good stock?

Operationally, there’s not a lot to shout about. But that doesn’t mean it’s not a good stock to buy. The valuation could be good and the company could experience a turnaround. So, what does the data tell us?

Well, it’s currently trading around 13.9 times forward earnings for 2026. That’s based on the current projections that see an 8.3% decline in earnings for the coming year.

Analysts see a subsequent rise in earnings for 2027, with earnings per share rising 4% that year. This takes us to a price-to-earnings ratio around 13.5 times.

Clearly, it’s not overly expensive, but it’s also not offering much in the way of growth. And investors need to ask themselves this: if it’s not growing, what are we investing for?

Well, the only plausible answer to that is dividends, or even shareholder returns in the form of buybacks. The current forward yield sits around 4.4%. Yes, that’s better than most savings accounts, but a fraction of what I’d be looking to achieve from an investment in terms of total returns (dividend plus share price growth).

I’d also add that dividend cover is ok, but not overly strong at 1.7 times. This doesn’t mean that the dividend is in existential danger, but it’s worth bearing in mind if earnings do take a beating.

Of course, there’s more to consider. The company has a net debt position of £21.7bn. Plenty of that has been accrued while acquiring its portfolio of great brands — one of the business’s strength.

Personally, however, I don’t believe the stock is worth considering. There’s not much in the way of growth catalysts and the yield is ok, but nothing to write home about.

The post Down 29%, are Diageo shares — and their 4.4% dividend yield — worth the risk? appeared first on The Motley Fool UK.

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• How much could 1,216 Diageo shares earn me in annual dividends?
• Diageo’s down 50%! Is Warren Buffett’s old stock pick now a bargain?

James Fox has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Diageo Plc and Lloyds Banking Group 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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