A near-tripling in the price of Diageo (LSE: DGE) shares between 2012 and 2022 meant the dividend yield rarely rose much above 2%. As a result, the FTSE 100 alcohol stock was widely seen as offering more potential for growth than income.
However, with Diageo down 35% since the start of 2022, the yield has risen to just above 3%. This is also due to the resilience of the dividend, which continued during the pandemic when other blue-chip firms were cutting, axing, and postponing payouts.
Dividend forecast
In the table below, I show analyst consensus forecasts for dividends and earnings per share (EPS) up until FY27 (which ends in June 2027 for Diageo).
I’ve also added the implied price-to-earnings (P/E) multiple for each year, based on the current share price of £26 (7 October).
| Fiscal Year | Dividend | Yield | EPS | Cover | P/E |
| 2025 | $1.06 (81p) | 3.11% | $1.67 | 1.6x | 20.4 |
| 2026 | $1.11 (85p) | 3.26% | $1.77 | 1.6x | 19.2 |
| 2027 | $1.17 (89p) | 3.42% | $1.88 | 1.6x | 18.1 |
Of course, these projections could change and the payout isn’t guaranteed. But as things stand, the dividend cover looks reassuring, even if the growth is steady rather than spectacular at around 5%.
In terms of valuation, the forward P/E ratio appears fairly reasonable for a high-quality firm like Diageo. However, given its slowing sales in the challenging global alcohol market, I don’t believe it justifies a go-go earnings multiple in the 25-30 range, as it once did. Overall, I’d say the stock’s fairly valued right now.
Has the affordable luxury trend run dry?
For the past couple of decades, alcohol giants have pursued a premiumisation strategy. This has involved focusing on higher-end brands for consumers interested in more handcrafted, artisanal spirits.
These also happened to carry higher profit margins, while the firms could boast their environmental, social and governance (ESG) credentials by promoting moderation and responsible drinking. Or as Diageo phrases it, encouraging consumers to “drink better, not more“. Its high-margin premium brands include Johnnie Walker Blue and Don Julio tequila.
However, this strategy has come under pressure as cash-strapped drinkers trade down to the rough stuff. This has been most apparent in Brazil and Mexico, two of the company’s largest markets in Latin America.
In August, the analyst team at RBC Capital Markets said: “We estimate that the proportion of sales from high-end reserve brands fell from 29% in 2023 to 27% in 2024. We expect this decline to continue”.
If premium brand sales fall to 20%, the analysts added, then Diageo’s 5-7% medium-term revenue growth guidance (and margins) could be in jeopardy.
Would I buy the stock?
Clearly, the company faces challenges with the ongoing consumer spending squeeze and doubts about its premiumisation-led growth strategy. Both present risks to an investment.
Long term however, I reckon the spirits industry will prove resilient and Diageo will continue to be a solid cash cow. Rising disposable wealth in emerging economies should support its growth over time.
Take India, for example, where more consumers are seeking premium spirits, aligning with Diageo’s premiumisation strategy. India has a young population, with a significant number of consumers entering legal drinking age each year. This creates a growing base of potential customers for brands like Guinness and Smirnoff.
In the here and now, inflation finally seems to be under control, which has to be good news for Diageo. I’d buy the FTSE 100 stock while it’s languishing if I hadn’t done so already.
This post was originally published on Motley Fool
