⬆️ Morning Star analysis...27 Feb 2026 10:55
⬆️. Recovery in play....perhaps? Morning Star thinks so...
Analyst note
Diageo Earnings: Shares Slide With Lowered Guidance and Dividend Cut, but Reset Is Underway
Diageo’s first-half fiscal 2026 results included an organic net sales decline of 2.8% and an operating profit decline of 2.8%. Volumes were down in all regions except Africa, and profitability was pressured by negative mix, cost inflation, and tariffs. Shares fell 6% at the market open on Feb. 25.
Why it matters: Similar to Pernod Ricard, performance remained weakest in the US and China. Management lowered its guidance, now expecting a sales decline of 2%-3% and flat to low-single-digit operating profit growth. The company also cut its fiscal 2026 dividend outlook to a floor of $0.50, compared with $1.03 in fiscal 2025. We expect Diageo to reach the lower end of its updated targets, as well as its maintained cash flow guidance of USD 3 billion. We expect cost savings under the Accelerate program to support results; however, they will not fully offset cyclical headwinds. The recently appointed CEO, Dave Lewis, highlighted an array of pain points in the firm, including Guinness capacity constraints, poor off-trade customer service, and underdevelopment in the ready-to-drink category. We expect that improving these areas and reducing debt will be prioritized in the near term over returning capital to shareholders.
The bottom line: We lower our fair value estimates for wide-moat Diageo to GBX 2,140/$116 from GBX 2,260/$118. This decrease stems from lowering our fiscal 2026 forecasts, while our medium-term growth projections are unchanged. Despite trimming our fair value 5%, we still view shares as undervalued. We hold our view that Diageo’s broad portfolio and geographic diversification will enable it to withstand industry shifts. We believe Diageo’s biggest headwind of pressured consumer wallets in the US is cyclical. We think Diageo’s turnaround priorities should improve its positioning, including price repositioning, improving customer service, and organizational redesign.
Coming up: We expect a more detailed strategy proposal in the third calendar quarter.
25/02/2026
by Verushka Shetty for Morningstar