It’s been a terrible few years for Diageo (LSE: DGE) shares, and for anyone holding them. I know how that feels. I bought the FTSE 100 spirits giant after the initial profit warning in November 2023, triggered by a dip in sales across Latin America and the Caribbean. I decided it was a short-term wobble. It wasn’t.

Diageo has since been blitzed from every direction. The cost-of-living crisis, US tariffs, weight-loss drugs and supposed Gen Z abstinence have combined to threaten both short- and long-term demand for spirits.

Diageo’s ‘drink better’ strategy, encouraging consumers to buy fewer but higher-quality brands, has been squeezed from two sides. Cash-strapped drinkers have traded down, while the health-conscious simply give up. Yet I kept faith. Every time the shares dipped, I averaged down. Surely they had to recover at some point?

FTSE 100 recovery stock

I bought another tranche when former Tesco turnaround star Dave Lewis was appointed chief executive. The job seemed tailor made for him. Then I realised my mistake. When Lewis arrived at Tesco in 2014 he embarked on a brutal ‘kitchen-sinking’ exercise, throwing every possible piece of bad news at investors. The shares took a year to recover. He’s taken a similar approach at Diageo.

On 25 February, Lewis cut full-year guidance and slashed the dividend in half. That last move stung. Diageo was finally turning into a decent income stuff. To be fair, he didn’t have many options. In North America, the group’s biggest market, sales fell 6.8% in the six months to 31 December. In Greater China they collapsed more than 40%.

Inflation threat

Now we have war in Iran. If this triggers another inflation spike, consumers may tighten their belts further and drink even less. Diageo’s fallen 20% in the last month. It’s now down 30% over one year and almost 60% over three.

At least the valuation looks more modest, with a forecast price-to-earnings ratio of 12.7 for 2026. Sadly, the 5.4% trailing yield is expected to slump to 2.9% for 2026. The 2027 forward yield’s 3.2% though.

Strategy shift

Diageo remains a huge global drinks business with a portfolio of top brands including Johnnie Walker, Smirnoff, Guinness and Baileys. Lewis has also dismissed the idea that the world’s suddenly going to stop drinking. He also plans to direct marketing efforts at mass market brands like Smirnoff.

The situation reminds me of Rolls-Royce. Its shares went from bad to worse. Then took off like a rocket. I can’t see Diageo staging such a spectacular surge. But after years of relentless bad news, its luck has to turn at some point.

There are plenty of risks. Weight-loss drugs, shifting lifestyles and economic weakness could all hit demand. But markets tend to move in cycles. I’m planning to hold my shares until the upswing. Brave long-term investors might consider buying today. I might do so myself. It’s always darkest before the dawn…