Diageo (LSE:DGE) shares have been creeping higher. Since early October, they’ve risen 11%.
Ok, that’s not enough to start popping Champagne corks, but it’s far better than the FTSE 100‘s 2% return over this period. And while Diageo remains 52% lower than five years ago, all turnarounds have to start somewhere.
So should I buy more Diageo shares for my ISA? Let’s discuss.
A very challenging few years
For Diageo shareholders, the party started to come to an end in 2022 when inflation and interest rates began rising. Coming out of the pandemic, this immediately put pressure on consumer spending.
Then in late 2023, the Johnnie Walker owner issued a shock profit warning. Not only did this categorically prove that the pandemic-era boom in premium spirits was over, but led to a massive build-up of unsold booze in Latin America making investors question the level of control Diageo had over its distribution channels.
Fast-forward to today, the cost-of-living crisis hasn’t gone away. Many bars and pubs are like ghost towns, both here and abroad. But while pubs struggle, gyms are booming. This points to another challenge for alcohol companies, which is a generational shift towards healthier living.
Enter Sir Dave
Despite the challenging backdrop, investors appear to be warming to the stock due to new-ish CEO Dave Lewis’s turnaround efforts. Since taking the helm in January, he has been cutting costs, with $1bn in savings planned over the next three years. Around 25% of these will come this year (fiscal 27).
Meanwhile, the dividend was reduced to save cash and more non-core assets are being sold to deleverage the balance sheet. At the end of FY26, net debt to adjusted EBITDA was 3.1x, down from 3.4x the year before.
Crucially, Lewis is aiming to make Diageo more competitive in North America, a key market where organic net sales fell 8.4% last year. To boost sales, the firm will prioritise alcohol categories that are still growing, particularly ready-to-drink (RTD) beverages.
RTDs are things like canned cocktails. Diageo created this space 25 years ago with Smirnoff Ice, but deprioritised it to focus on more upmarket spirits offerings. Last year, RTDs were only 4% of net sales.
However, they’re increasingly popular due to their portability and affordability compared to bars. They’re also perceived as more healthy among Gen Z drinkers.
Therefore, RTDs represent an interesting growth opportunity, especially as Diageo owns top-tier brands across various categories: tequila (Don Julio), vodka (Smirnoff, Ketel One), gin (Tanqueray, Gordon’s), and rum (Captain Morgan).
Our strategic focus is clear. Diageo will compete across a full price and format ladder in spirits, including RTDs, in premium beer through Guinness, and across the on-trade to ensure consistent global visibility.
Sir Dave Lewis
Buy more shares?
Diageo’s targeting low-single-digit growth in organic net sales through to FY29, with growth accelerating over this period. Profits will rise at a slightly faster rate while $8bn of cumulative free cash flow is expected over these three years.
With the foundations being put in place for a return to growth, I think Diageo’s worth considering. But before I buy more shares, I want to read the firm’s Q1 trading update to make sure the recovery’s still on track.
I don’t have long to wait — it’s due on Bonfire Night (5 November).
Should you invest £5,000 in Diageo Plc right now?
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Ben McPoland owns shares in Diageo.
