Why Diageo Shares Fell 60%: Spirits Slump, Tequila and the Dividend Cut

Make a guess

Nearly three years ago, Diageo warned that sales in Latin America would collapse. How far did its shares fall that day?

Tap your guess

Under 5%Your guess5% to 10%Your guess10% to 15%Your guessOver 15%Your guess

01234567890123456789.0123456789%One-day fall

Spot on.Close, a little low.Close, a little high.Way off, too low.Way off, too high. It was 12.2%.

The shares closed 12.2% lower, from 3,245p to 2,850p, the biggest fall in the FTSE 100 that day. The dividend cut this year did almost the same damage: 12.7% in a day.

How far has Diageo's share price fallen?

About 61% from its record close, and the slide has been almost continuous. The shares bottomed this spring at about 1,360p, rallied when Lewis set out his plan and now sit around 1,611p. They are still around half their level of five years ago, while the wider UK market has risen by nearly half.

Five years: Diageo down 55%, the FTSE 100 up 48%

02550751001251505y ago4y3y2.5y2y1yNowDiageo −54.6% vs FTSE 100 +47.8%45.4Diageo147.8FTSE 1005y ago100.0100.04.5y112.5106.74y105.198.83.5y103.7109.43y85.7105.92.5y79.5112.22y72.9117.31.5y55.7108.81y50.1134.06m39.1146.2Now45.4147.8

For a US investor, Diageo also trades in New York as an American depositary receipt (ADR), a certificate that represents four ordinary shares. The story is the same in dollars.

The fall has three distinct legs. The first came as the pandemic drinks boom unwound. The second was the Latin America warning, which broke Diageo's reputation for predictable growth. The third came over the past two years as US spirits demand turned down, tariffs arrived and the dividend was cut.

What was Diageo's Latin America profit warning?

During the pandemic and just after it, distributors and retailers in Latin America and the Caribbean (LAC) loaded up on Diageo's spirits. When drinkers there started trading down to cheaper bottles, that stock sat on shelves. Diageo kept booking sales to distributors who no longer needed them. This is channel inventory: product that has been sold by the brand owner but not yet bought by a drinker. When it gets too high, the brand owner's sales must fall below real consumption until the excess clears. The industry calls that destocking.

Nearly three years ago, Diageo issued an unscheduled warning. As The Irish Times reported, the region made up about 11% of group sales and was now expected to fall about 20% in the half year. Chief executive Debra Crew blamed "really more consumer downgrading than what the team was expecting." The actual number was worse: LAC organic net sales fell 23%.

Find the cause

Diageo's Latin American drinkers didn't vanish, yet regional sales fell about a fifth. Which line explains most of it?

Diageo, Latin America and Caribbean warning

A new competitor launched a cheaper tequila Distributors held more stock than drinkers were buying, so they stopped ordering Diageo raised prices sharply Currency moves cut reported sales

Tap the phrase you think is the tell.

Spotted it.Not that phrase. Destocking. Sales to distributors fell far below what drinkers were consuming until the excess inventory cleared.

• “A new competitor launched a cheaper tequila” Competition existed, but Diageo didn't blame a single rival.
• “Distributors held more stock than drinkers were buying, so they stopped ordering” Inventory built in the boom had to clear before orders resumed.
• “Diageo raised prices sharply” The problem was drinkers trading down, not Diageo pushing prices up.
• “Currency moves cut reported sales” Organic figures strip out currency. The fall was real.

Explain every phraseHide the other explanations

The lasting damage was to credibility. "Organic" growth, Diageo's preferred measure, strips out currency moves, acquisitions and disposals so investors can see underlying demand. Investors learned that even organic growth could be flattered by stock building up in the trade, and they started to ask whether the US had the same problem. It did. A recent Diageo trading statement blamed a 15.4% drop in quarterly US spirits sales partly on tough comparisons with tequila restocking a year earlier.

Why did Debra Crew leave, and who is Dave Lewis?

Crew left abruptly last year without a successor in place. Chief financial officer Nik Jhangiani ran the company as interim chief executive for nearly six months. Then the board appointed Sir Dave Lewis, who started at the beginning of this year. Lewis ran Tesco for six years, where he is credited with turning the business around, after nearly three decades at Unilever. His Diageo plan follows a familiar turnaround script: cut costs, sell what isn't core, and reinvest in competitiveness.

From profit warning to reset in under three years

1. ~3 yrs agoLatin America warningShares fall 12.2% in a day
2. Last yrCrew leavesCFO Nik Jhangiani becomes interim CEO
3. Last yrLewis appointedFormer Tesco chief, starts at the turn of the year
4. This yrDividend halvedInterim cut from 40.50c to 20c; shares fall 12.7%
5. This yrCapital markets day$1bn of savings; shares rise 5.6%

His first results were brutal. Diageo's half-year filing cut sales guidance again, cut the interim dividend from 40.50 cents to 20 cents, and set a payout ratio of 30% to 50% of earnings with a floor of 50 cents a year. The board said the cut would "accelerate the strengthening of our balance sheet". The shares fell 12.7% that day.

Then came the full-year numbers and a capital markets day, an event where management sets out multi-year targets. The preliminary results showed organic net sales down 2.0%, organic operating profit up 2.0% and free cash flow, the cash left after running the business and investing in it, up $463 million to $3.2 billion. Reported operating profit fell 27.2% after $1.5 billion of impairments, accounting write-downs of brands and businesses, mainly in Türkiye and on the Don Papa rum brand.

Where is Diageo losing sales?

North America. The Spirits Business breakdown shows North American organic sales down 8.4%, US spirits down 11.5% and US tequila down 21.1%. Asia Pacific fell 6.3%, dragged by a 47% slump in Chinese white spirits (baijiu), where Diageo says it is "working through the consequences of Government policy". Everywhere else grew.

North America is the hole; Africa and Latin America are growing

Africa+13.3%

Latin America & Caribbean+7.7%

Europe+3.4%

Asia Pacific−6.3%

North America−8.4%

Organic net sales growth by region, last financial year.

Look at how the group number splits. Volume, the number of cases sold, fell only 0.4%. Price/mix, the effect of price changes and of selling more or less expensive brands, took off 1.6%. Diageo isn't mainly losing drinkers. It is losing the premium end of its US business, where people are trading down or simply buying less.

Is the spirits slump a cycle or a structural decline?

Both stories have evidence. The key is how much weight each deserves.

The cyclical case

Three forces look temporary. First, destocking: wholesalers and retailers overstocked during the post-pandemic boom and have spent the past few years running inventory down. Pernod Ricard reported US sell-out, sales to drinkers, down about 7% while its own US sales fell 14%, a gap that only inventory can explain. Second, squeezed US household budgets: Diageo's half-year filing blamed tighter disposable incomes and competition from cheaper alternatives. Third, China, where a policy shock rather than changing tastes hit baijiu. Diageo says sales would have been about 1.5 percentage points higher without it.

The structural case

Fewer Americans drink. Gallup's latest survey found 54% of US adults drink alcohol, matching last year's record low in a series that dates back almost nine decades. Three years ago it was 62%. And 51% now say one or two drinks a day is bad for your health, against 27% a quarter of a century ago.

The share of Americans who drink fell 8 points in two years, then held

0255075%3 yrs ago2 yrs agoLast yrNowRecord low, unchanged on last year54%US adults who drink alcohol3 yrs ago62%2 yrs ago58%Last yr54%Now54%

Gallup says drinking has fallen since three years ago in every age group. Young adults stand out: only about half of 18-to-34-year-olds drank last year, down from nearly 60% two years earlier. Weight-loss drugs in the GLP-1 class, such as Ozempic and Wegovy, also dampen the urge to drink. An EY-Parthenon survey of GLP-1 users, which is also the source of the age figures above, found 44% drank less after starting treatment. Among those who cut back, 40% reduced spirits. Asked what they drank instead, 47% named low-alcohol drinks and 18% cannabis-infused drinks.

The household data are far milder. EY puts the fall in alcohol consumption in GLP-1 households at just 1.9%. Gallup's own survey shows the drinking rate stopped falling this year, and the drinkers who remain reported more drinks per week than last year.

Check the claimFour claims about the spirits slump, tested

ClaimGen Z has given up drinking.Tap to checkPartly trueOnly about half of 18-to-34-year-olds drink, down from nearly 60%, but Gallup found drinking fell in every age group. It isn't just a youth story.Flip backClaimWeight-loss drugs are killing alcohol sales.Tap to checkMyth44% of users say they drink less, but measured household alcohol consumption falls only about 1.9%. A real drag, so far a small one.Flip backClaimDiageo is selling far fewer bottles.Tap to checkMythGroup volume fell just 0.4% last year. Most of the 2.0% sales decline came from price and mix as drinkers traded down.Flip backClaimPart of the US slump is distributors cutting stock.Tap to checkFactDiageo blamed a weak quarter partly on restocking a year earlier, and Pernod's US sales fell twice as fast as sell-out.Flip back

Our weighting is roughly two-thirds cycle, one-third structure. Destocking ends by definition. China is a policy shock. Consumer budgets recover. What doesn't come back is the long US premiumisation boom, the years when drinkers kept trading up to pricier bottles. Its tailwind was so strong that it hid weak execution. A flat-volume market with a slow trade-down is far harder to manage, but it isn't a business in collapse.

How much do US tariffs cost Diageo?

Less than the headlines suggest, but they arrived at the worst time. In its results a year ago, Diageo estimated the cost at about $200 million a year before mitigation. That assumed a 10% US tariff on UK imports and 15% on European ones, with Mexican and Canadian spirits exempt under the USMCA, the US–Mexico–Canada trade agreement. Tequila and Crown Royal therefore escaped. Scotch, Irish whiskey and Guinness did not. Diageo expected to offset about half before raising any prices.

Tariffs cost Diageo about $100 million a year after mitigation

Gross tariff cost$200m

Mitigation−$100m= $100m

Net hit$100m

The bigger tariff cost is indirect. Most Canadian provinces pulled American-made spirits from shelves in retaliation, a direct hit to Brown-Forman's Jack Daniel's. Cross-border trade policy has also made it harder for every spirits company to plan inventory.

Tequila or Scotch: which bet is working?

Diageo made tequila its growth engine and bought heavily into it, including Casamigos. That bet has turned. US tequila sales fell 21.1% last year, Don Julio 19.2% and Casamigos 27.7%, and Diageo is repositioning Casamigos. Scotch, the older category many investors had written off, grew 2% worldwide, as did Johnnie Walker. Crown Royal, the Canadian whisky, fell 15%.

The old whisky brands held up; the new tequila bets fell hardest

Ready-to-drink+15.0%

Scotch+2.0%

Johnnie Walker+2.0%

Crown Royal−15.0%

Tequila−16.0%

Don Julio (US)−19.2%

Casamigos (US)−27.7%

Chinese white spirits−47.0%

Organic net sales growth, last financial year.

The lesson isn't that tequila is finished. US tequila grew 16.9% for Diageo the year before last, so a correction was due. The lesson is that Diageo paid premium prices at the top of a fashionable category, and it shows: this year's impairments included Don Papa, a rum brand it bought in the boom years.

Peers saw the same thing. Brown-Forman's results show its tequila sales down 6% on an organic basis, with Herradura down 10%.

Is Guinness the bright spot, and should Diageo sell it?

Guinness is the best thing Diageo owns. The stout grew double digits the year before last, did so again in Great Britain last year, and grew double digits across Europe in the latest quarter Diageo has reported. Diageo's Great Britain sales rose 2.9% only because Guinness offset weaker spirits. Lewis calls Guinness and ready-to-drink cocktails his two "strategic battlegrounds". According to Global Drinks Intel, Diageo will spend just under $1 billion over three years to double Guinness production.

Selling it would raise cash fast. Last year Bloomberg reported that Diageo was exploring a Guinness sale or spin-off at a value above $10 billion. Diageo replied that it had "no intention to sell". Diageo has sold other things instead: its stake in East African Breweries to Asahi for about $2.3 billion of net proceeds, the Royal Challengers Bengaluru cricket team in India, Guinness Ghana and Guinness Nigeria, and Sheridan's liqueur.

Keep or sell Guinness: the case each way

Keep itLewis's choice

• Double-digit growth in its biggest markets
• Just under $1bn to double production
• Offsets weaker spirits in Britain

Growth Diageo can't replace

vs

Sell or spin it offThe bear case for leverage

• Bloomberg valued it above $10bn
• Would cut net debt of $20.5bn fast
• Leaves a pure spirits company

Cash now, weaker growth later

We think Lewis is right. Selling the fastest-growing asset to plug a hole elsewhere is how good companies become worse ones. The East Africa sale at about 17 times EBITDA (earnings before interest, tax, depreciation and amortisation) is the better template: sell what others value more than you do.

Can Diageo afford its dividend now?

Yes, comfortably, and that is exactly why it was cut. Diageo ended the financial year with net debt of $20.5 billion, 3.1 times EBITDA, down from 3.4 times. Its capital markets day statement targets 2.5 to 3.0 times, a ratio known as leverage, and expects to be around the middle of that range within a year once the East Africa and cricket sales complete.

Lewis's targets for the next three years

$1bnCost savingsAbout $850m from a new operating structure

~$8bnFree cash flow over three yearsAfter about $850m of restructuring cash costs

2.5–3.0xNet debt to EBITDA targetDown from 3.1x now

The arithmetic explains the cut. Diageo has about 2.2 billion shares. At the old 103.48 cents, the dividend cost roughly $2.3 billion a year. Diageo expects free cash flow of only about $2 billion this financial year, after restructuring costs, so the old payout would have been funded partly with debt. At 50 cents, the dividend costs about $1.1 billion, and the rest of the cash goes to paying down debt and to the turnaround.

The 50-cent floor binds unless earnings or the payout ratio rise

Pick underlying EPS and the payout ratio inside Diageo's 30% to 50% policy

Underlying EPS

140c150c165.3c (last yr)180c195c

Payout ratio

30%40%50%

Dividend per share50.0c56.0c70.0c50.0c60.0c75.0c50.0c66.1c82.7c54.0c72.0c90.0c58.5c78.0c97.5c

−51.7%−45.9%−32.4%−51.7%−42.0%−27.5%−51.7%−36.1%−20.1%−47.8%−30.4%−13.0%−43.5%−24.6%−5.8%below Old dividendbelow Old dividendbelow Old dividendbelow Old dividendbelow Old dividendbelow Old dividendbelow Old dividendbelow Old dividendbelow Old dividendbelow Old dividendbelow Old dividendbelow Old dividendbelow Old dividendbelow Old dividendbelow Old dividend

Old dividend 103.48c

50.0c97.5c

Even with the cut, the dividend yield is about 2.3% at today's price. Had the old dividend survived, the yield would be close to 5%. Income investors who bought Diageo as a bond substitute have paid twice: once on the price, once on the income.

How does Diageo compare with Pernod Ricard, Brown-Forman and Rémy Cointreau?

Diageo hasn't been singled out. Every big listed spirits company has fallen further from its peak. The difference is in how each is handling it.

Diageo has actually fallen the least of the big four

Rémy Cointreau−80%

Pernod Ricard−71%

Brown-Forman−68%

Diageo−61%

Share price change from each stock's highest month-end close in the past ten years, Diageo from its record daily close.

Pernod Ricard's results were worse than Diageo's: organic sales down 3.9%, US down 14%, China down 19%. Yet it held its dividend at €4.70 a share on recurring EPS of €5.85, a payout of about 80%, with leverage at 3.7 times. Brown-Forman, owner of Jack Daniel's, kept organic sales flat but expects organic operating income to fall 3% to 5% this year. Rémy Cointreau, the most exposed to cognac and China, halved its dividend to €0.75 as leverage rose to 3.22 times.

Price/earnings uses the latest share price over underlying EPS for Diageo (165.3 cents), Pernod (€5.85) and Rémy (€1.71), and reported diluted EPS for Brown-Forman ($1.53).

Pernod's high yield is a warning, not a bargain. It is paying out four-fifths of shrinking earnings while carrying more debt than Diageo, the position Diageo was in before Lewis acted. Diageo now has the cleanest balance sheet path of the European pair. At about 13 times earnings on the price-to-earnings measure, it also carries a modest valuation for a business with organic operating margins near 29%.

What could go wrong?

Lewis has guided to flat organic sales this financial year, with North America down mid-single digits. If the US market falls faster than the roughly 3% decline he assumes, the $1 billion of savings gets spent defending share rather than rebuilding profit. A second leg of the GLP-1 story, with wider adoption and cheaper pills, would push the structural share of the slump above our one-third. Tariffs could widen. And restructurings at this scale, at a cost of about $1.2 billion, often disrupt the very sales teams they are meant to sharpen. Lewis's Tesco turnaround took years, not quarters.

Our read

Diageo's fall is mostly a cycle. Post-pandemic destocking, a Latin American hangover, a Chinese policy shock and a stretched US consumer explain most of the damage. A smaller structural shift sits underneath, with fewer Americans drinking and health worries rising. Then there is a Diageo-specific failure: it paid up for tequila at the peak and let its US business become uncompetitive.

The share price now assumes something closer to permanent decline. At about 13 times earnings, with volume down less than half a percent and margins rising, the market is pricing Diageo like a melting ice cube. The evidence says it is a strong portfolio in a flat market, run for years as if growth were guaranteed.

The dividend cut was the right call, and late. The old payout cost more than this year's expected free cash flow. Cutting it lets Lewis pay down debt, fund Guinness and fix North America without selling the crown jewels.

The test is North America over the next year or two. If US declines narrow toward the market and Guinness keeps growing, Diageo can get back to the low-single-digit sales and mid-single-digit profit growth it has promised. That would be enough for a stock this cheap. If the US keeps losing share, the turnaround will take far longer than the market is prepared to wait.

Go deeper

• Cyclical companies: how to tell a destocking trough from a permanent decline, the central question for Diageo.
• Debt and liquidity: why 3.1 times EBITDA forced a dividend cut, and how to read leverage targets.
• Capital allocation: judging Lewis's choices between dividends, debt reduction, Guinness capex and disposals.

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