Though initially not planned as a trilogy in that sense, today I am taking a closer look at Diageo, the world’s biggest spirits company. Like its competitors Pernod Ricard and Brown-Foreman, Diageo stock has nosedived, and caused strong headaches for its investors. After the stock got cut in half, while the broader market ran from high to high, the question arises, whether this could be a good contrarian pick right now. Especially with the dividend now being on a historically high level.

Summary and key takeaways from today’s Weekly
– Diageo stock came down 50% from its high – an unprecedented development.
– While many voices are calling for a great opportunity, and cheap valuations, I caution that the former setup likely does not work anymore.
– To the contrary, I fear there might still be lots of potential for disappointments.

My longer-time readers know my view on alcohol stocks.

In prior Weeklies (see here, here, and here), I expressed my skepticism, and stressed that I do not view the crash of these stocks as a minor coincidence, or just as a cyclical correction, like many other voices do.

I have heard and read of comparisons to tobacco stocks. Frankly, I had similar thoughts on this front. Both categories are seen as “sin stocks”, both have a rather negative public perception as being death-accelerators (and causing healthcare costs to rise), but it is not thinkable that they disappear from our everyday lives.

Not to forget, their stocks for a long time have been strong compounders, and on top reliable dividend payers.

After the windfall boom during 2020–2022, these businesses went into free fall.

Voices to buy every dip did not wait too long to become louder. Until here, it was rather a bad idea to take a sip this early.

However, I remain convinced that at some point sentiment might turn too negative. This requires dirt-cheap, no-brainer valuations which imply the companies might be going out of business tomorrow, better later today.

Are we at that point? I am now trying to answer this question by looking at the world’s Primus inter pares of the sector.

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^{both as per 20 August 2025 market close – since August 2022}

Is Diageo walking or stumbling?

Diageo (ISIN: GB0002374006, Ticker: DGE) in its current form was created in 1997 through a merger of equals between the former Guinness PLC and Grand Metropolitan PLC. Both have already been acquiring different brands to grow their portfolios. For example, Johnnie Walker (whisky) was acquired by Guinness PLC (beer) in 1988.

The predecessor entities trace back to the 18th century with Arthur Guinness founding the Guinness brewery in 1759 and Grand Metropolitan’s origins linked to the catering and hotel business started by Maxwell Joseph in the 1930s. The latter bought Heublein Inc. in 1987, adding among others Smirnoff vodka to its portfolio. Grand Metropolitan began to divest its hotel business in the late 1980s.

This combination brought together rich histories in the spirits, beer, and beverage industry.

Today, Diageo is the by far biggest company of its kind. The number two, Pernod Ricard (ISIN: FR0000120693, Ticker: RI) has a market capitalization of not even half of Diageo.

Diageo is famous for brands like Johnnie Walker, Guiness, Smirnoff, Don Julio, Captain Morgan, Baileys, Tanqueray, Crown Royal, and Cîroc – just to name a few.

Taking now a look at the stock, here the London-listing (Diageo is also listed in the US under the ticker symbol DEO), we can see that until about 2022, the stock was slowly compounding upwards, only briefly interrupted by short-lived corrections.

However, since the high, we have seen an unprecedented collapse of 50%.

This is a novelty.

At least I cannot spot a drawdown of a similar magnitude above.

Usually, such a big move is seldom just a small correction with “stupid Mr. Market does not understand” as the reason. Unfortunately, this is what I have seen many times on twitter, I am not joking.

In my previous Weeklies, but also in-between on twitter, I have been vocal about what I see as a structural shift in the alcohol sector. People are drinking less, for various reasons. This does not seem to be just a sudden movement to a healthier lifestyle, even though charts like the following clearly do point in this direction.

There’s certainly something to it. I do not want to deny that.

But the other part of the truth is that alcohol, and especially drinking outside, has seen massive cost increases. The result is that the companies, to save their sales and brand values, hiked prices aggressively, at the expense of volumes.

And this is the most critical point from my view. No new bull market when volumes do not turn the corner and start rising again.

It has worked for tobacco where people are strongly addicted, and where the companies barely invest in legacy tobacco, as the products are standardized, and the markets strongly consolidated. But alcohol consumption is easier to reduce, as most people are not addicted, unlike is the case with smokers.

And there’s a second aspect many seem to be underestimating – I am going to elaborate on that further below.

Let’s now take a look at Diageo’s latest results which the company reported last week.

The screenshot from their press release shows the following main points:

• reported net sales were flat
• operating earnings cratered by 28%, margins went down significantly
• the same for net profit, even more pronounced
• operating and free cash flow were up
• organic net sales were up by 1.7%

What to make out of this?

First of all, there’s no denying that the weaker GBP / USD exchange rate had a negative effect on the reported numbers. Portfolio reshuffling likewise contributed negatively, including restructuring costs and some asset value write downs – one-off effects.

Organic sales, i.e. on a comparable basis, were up by 1.7%. This was driven by price hikes of 0.7%, and on the positive, volume increases of 0.8%. Diageo also reported to have held or even increased market share in about two-thirds of its markets. That’s certainly a good start.

Does not read that badly, at least better compared to other releases.

Thanks to a mix of cost savings, the company was able to post a higher operating and free cash flow. While nice on the surface, there’s certainly more needed than just cutting costs, as the juice at some point in time will be squeezed out of the lemon. I am mentioning this as one should not make the mistake to see this as growing cash flow from a point of strength (or organic growth).

I was not able to confirm the mentioned working capital movements in the free cash flow line from the slide below. Working capital was about flat according to the cash flow statement. Even if, this would have been a one-off effect either.

As to the outlook, sales growth dynamic is expected to remain about the same, while free cash flow is expect to be meaningfully higher, rising from 2.7 bn. USD (the company is reporting in USD), to 3 bn. USD.

This is not thanks to a miracle, but management intends to lower Capex – another one-off effect that does not create organic growth on a sustainable basis.

What should be clear now is the former growth story seems to be over.

With less growth, the once astronomically high valuations should not be the point of reference for where the stock could go in the future.

Clearly a weak point remains the balance sheet from my view.

Like its competitors, Diageo carries around a significant debt load. From what I can tell, this seems to be the result of wrongly calculated growth – too high expectations. With growth now having come to an end, the 21.5 bn. USD in net debt, or 3.4x net debt to EBITDA, are clearly holding the stock down.

Management promised to lower debt to a target range of 2.5–3.0x net debt to EBITDA. However, this will happen only slowly, if at all, and is envisioned for FY 2028 – in three years.

I will come back to the debt when I discuss the valuation.

Now, let’s zoom out, for a big picture overview.

Diageo has seen slowly growing sales, but a major bump in FY 2022 (the time of the all-time high of the stock). Since then, sales are not growing anymore.

On a rolling twelve-month basis, we can see, too, growth is not to be found.

Gross and operating margins are today where they were ten years ago. Unfortunately, this is the low-point, as in between margins have been expanding.

What has been reliably growing are debt and interest expenses.

So in total, where does Diageo stand in terms of valuation?

On the surface, a dividend yield on the high end of the historical range might be tempting, as Diageo is often seen as a dividend stock.

3.7% is not extremely high a dividend, but in relative terms it is rather significant for this particular case. Unlike at Brown-Foreman, and especially Pernod-Ricard, I view the dividend of Diageo as being safe. It costs the company 2.2–2.3 bn. USD a year, while FCF was guided to come in at 3 bn. USD next year.

My concern is the still high valuation, paired with the lack of growth.

Looking just at the market cap, ignoring the big debt load, we have c. 60 bn. USD equity market cap vs. guided 3 bn. USD in FCF. This alone is a still steep multiple of 20x for a not-growing company.

Adding now 21 bn. USD in net debt, the enterprise value is a bit more than 80 bn. USD – resulting in an EV / FCF of 27x, or an expected FCF yield of just 3–4% with no growth.

For me, this is the opposite of an attractive setup, not to mention any no-brainer territory that I would like to see. Ideally, to be able to make comparisons to tobacco stocks, we need to see multiples of around 10x for my taste. This would not price in any growth. Then either the companies could repurchase aggressively their shares, and any improvement in growth, even if only small, could and likely would lead to a revaluation higher.

But expectations are still quite lofty.

This means, there is further room for disappointments. It clearly is.

The reason I am seeing this is, besides the volumes problem, the shift to low- to non-alcohol beverages. Diageo in its press release further below the headline figures had the following paragraph.

The broader non-alcohol portfolio grew by 40%. I don’t know from which base, likely not significant, else management would have positioned it more prominently.

The problem is, even though it sounds like great news, I fear that this is the opposite. From the market-leader for aluminum cans, Ball Corp. (ISIN: US0584981064, Ticker: BALL), I have found a very interesting passage in their latest earnings call.

Is it be possible that non-alc will be a lower-margin business?

I think this is a serious danger to think about. One plausible argument that instantly comes to my mind is that this space is significantly more crowed than the rather consolidated spirit space. With non-alcoholic and RTD (ready-to-drink) offerings, the company will be competing against makers of soft drinks, energy drinks, cocktails, non-alcoholic beer, etc.

These have lower margins, and more competition is seldom attractive for a business.

I do not think this creates a compelling case in favor of Diageo.

Certainly not at this valuation.

Conclusion

Diageo stock came down 50% from its high – an unprecedented development.

While many voices are calling for a great opportunity, and cheap valuations, I caution that the former setup likely does not work anymore.

To the contrary, I fear there might still be lots of potential for disappointments.

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