Diageo: A Global Spirits Powerhouse

Diageo is one of the world’s largest alcoholic beverage companies, with a portfolio that spans premium spirits, beer, and emerging non-alcoholic offerings. From iconic brands like Johnnie Walker, Guinness, and Don Julio to innovations in ready-to-drink cocktails and zero-alcohol spirits, the company combines heritage with adaptability to shifting consumer trends. With a global footprint across nearly 180 countries and a strategy focused on premiumization, innovation, and brand strength, Diageo is positioning itself for sustainable growth in a changing industry. The question is: Does this global drinks leader deserve a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Diageo at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Diageo, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Diageo is one of the world’s largest producers of alcoholic beverages, offering a portfolio of more than 200 brands across spirits and beer. Its labels span Scotch whisky with Johnnie Walker and Buchanan’s, vodka with Smirnoff, tequila with Don Julio and Casamigos, rum with Captain Morgan, liqueurs with Baileys, gin with Tanqueray, and stout beer with Guinness. This breadth allows the company to participate in nearly every drinking occasion, from everyday consumption to ultra-premium luxury. Diageo operates in close to 180 countries, with North America contributing about one-third of revenue and the rest diversified across Europe, Asia-Pacific, Africa, and Latin America. International spirits represent the majority of sales, complemented by a resilient beer segment led by Guinness. Its scale positions it well to benefit from long-term consumer trends, particularly the global shift toward premiumization, cocktail culture, and rising demand in emerging markets. Headquartered in London, Diageo was created in 1997 through the merger of Guinness and Grand Metropolitan and today ranks among the world’s top spirits companies by retail sales. Diageo’s competitive position rests on a combination of brand leadership, global scale, and portfolio depth. It owns more billion-dollar brands by annual sales than any rival, and household names such as Johnnie Walker and Guinness enjoy enduring consumer loyalty and pricing power. The company operates over 130 production sites and leverages a distribution network that reaches nearly every corner of the world, securing economies of scale in manufacturing, procurement, and marketing. Its portfolio spans geographies, categories, and price points, giving it resilience against regional downturns and shifts in consumer behavior. Distributors and on-trade outlets often prioritize Diageo’s products because of their popularity and the company’s ongoing investment in promotion and consumer insights. In addition to its own portfolio, Diageo holds a 34 percent stake in Moët Hennessy, LVMH’s wine and spirits division, which gives it exposure to the champagne and cognac markets and represents a valuable long-term asset. Altogether, Diageo’s moats are built on its iconic brands, vast distribution footprint, and cost advantages, which together create a powerful and enduring competitive edge in the global beverage alcohol industry.

Management

Nik Jhangiani was appointed CFO of Diageo plc in September 2024 and became interim CEO in July 2025. He brings more than three decades of international finance and leadership experience across the consumer goods industry. A graduate of Rutgers Business School and a certified public accountant in New York, he began his career at Deloitte before moving into senior financial positions at Bristol-Myers Squibb and Colgate-Palmolive, where he served as Group Financial Director for Nigeria. He went on to spend over a decade in the Coca-Cola system, where he held senior finance roles across multiple regions. His positions included Group Chief Financial Officer at Bharti Enterprises, Chief Financial Officer at Coca-Cola Hellenic Bottling Company, Chief Financial Officer for Europe at Coca-Cola European Partners, and later Chief Financial Officer and Senior Vice President at Coca-Cola Enterprises and Coca-Cola Europacific Partners. At Diageo, Nik Jhangiani quickly made his mark as CFO by focusing on financial discipline, portfolio review, and operational efficiency. As interim CEO, he has demonstrated clear communication and decisive action, including cost-saving measures and a sharper focus on sustainable growth. His leadership style is often described as steady, disciplined, and investor-focused, with a strong emphasis on execution and financial resilience. Nik Jhangiani’s combination of global experience, financial expertise, and strategic decisiveness positions him as a credible leader to guide Diageo through its current challenges while reinforcing the company’s long-term competitive strengths.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Diageo has consistently delivered a ROIC above 10% for more than a decade, which is rare in the consumer staples space. The reason lies in its core strengths. Its portfolio of globally recognized brands allows it to command premium prices and strong margins. Its massive distribution and production network provides economies of scale, while disciplined cost control ensures efficiency. Together, these factors mean that every dollar invested in the business generates healthy returns well above the cost of capital, which is why Diageo has historically been able to sustain high ROIC levels. In fiscal year 2025, ROIC fell to its lowest level since 2016. The main reasons for the decline were lower income from Moët Hennessy, in which Diageo owns a 34% stake, and adverse foreign exchange movements. Both of these are external and largely cyclical factors rather than signs of underlying weakness in the business itself. This dip should not be seen as a structural problem. Diageo’s core business continues to generate strong cash flow, its brands still enjoy pricing power, and its scale advantages remain intact. In fact, management explicitly tracks ROIC as a priority metric, using it to measure how effectively the company turns its asset base into shareholder value. Recent efficiency programs, including a multi-year cost-saving initiative and portfolio optimization, are designed to protect and grow returns on capital over time.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Diageo’s equity has gone through two clear phases over the past decade. For many years, it steadily declined, and by fiscal year 2025 it was still below the level seen in 2016. This was not a sign of weakness but the result of deliberate financial choices. The company consistently repurchased its own shares, and when buybacks are larger than the growth in retained earnings, the accounting effect is a smaller equity base. At the same time, Diageo made greater use of debt, which was relatively cheap to access, to help fund its growth and capital return programs. This strategy supported high returns on equity but made the reported equity figure look smaller. In the past two years, however, equity has started to rise again. The main driver has been stronger retained earnings, as profits have grown and the company has been more disciplined with costs. Management has also slowed the pace of share buybacks, prioritizing balance sheet strength after a period of higher leverage. On top of that, Diageo earns a large share of its profits in foreign currencies, and currency translation has recently added a positive lift to reported equity.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Diageo’s free cash flow today is lower than it was a decade ago, even though the company has grown over that period. The main reasons are higher capital investment, less income from associates such as Moët Hennessy, and foreign exchange headwinds. None of these reflect a weakening of the underlying business, but they have weighed on reported cash generation. In the most recent year, Diageo’s free cash flow was roughly the same as the year before. The company managed its day-to-day cash flows well, for example by delaying some payments to suppliers and reducing the amount of money tied up in ageing stock. These actions helped offset the impact of weaker profit after one-off costs and unfavorable currency movements. Cash flow was also held back by high investment spending, as Diageo continued to expand its production capacity in areas where it expects strong long-term demand. Looking ahead, management expects investment to become lighter compared to sales, which should allow free cash flow to grow. The company has made it clear that strengthening cash generation is a priority. Diageo uses its free cash flow mainly to reward shareholders and to invest in the business. A large part goes to dividends, which the company has paid consistently for decades, making it an attractive stock for income-focused investors. Diageo has also regularly used cash for share buybacks, which reduce the number of shares increasing the ownership for shareholders. At the same time, free cash flow is used to fund investments in the business itself, such as expanding production capacity for fast-growing categories like tequila and Guinness, or upgrading supply chains to improve efficiency. In some years, Diageo has also directed cash toward acquisitions to strengthen its portfolio, such as the purchases of Casamigos and Don Julio in tequila. The free cash flow yield is at its highest level in a decade, indicating that the shares are currently trading at a more attractive valuation than usual. We will return to valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt, and it is crucial to assess whether a company can repay its obligations within a reasonable timeframe. One way to do this is by looking at the ratio of long-term debt to earnings. For Diageo, this ratio currently stands at 8,9 years, which is significantly higher than I would like to see. However, this figure is partly distorted by unusually low earnings in fiscal year 2025, meaning the picture looks worse than it might under more normal conditions. Management has admitted that debt has gone up and is now above the level they normally aim for. They explained that this is mainly because profits were lower in 2025 and currency movements worked against them. Looking ahead, they have made it clear that bringing debt back down is a priority, and they expect to get it back within their target range by 2028 at the latest. This will be helped by their cost-saving program and stronger cash generation in the coming years. Debt is therefore something to monitor, but it does not currently appear to be a major risk given Diageo’s strong cash flow, valuable brand portfolio, and clear plan to bring leverage down over time.

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Risks

Macroeconomic conditions is a risk for Diageo because the company’s performance is closely tied to consumer confidence, disposable income, and input costs. Operating across nearly 180 countries, Diageo is exposed to different economic environments, from mature markets like North America and Europe to fast-growing but often volatile emerging regions. When inflation is high and interest rates rise, consumers tend to cut back on discretionary purchases, including premium and mid-tier spirits. Even wealthier consumers have been showing restraint, which reduces demand for Diageo’s higher-end brands. Retailers are also more cautious in uncertain times, keeping leaner inventories to avoid risk. This can lead to slower reordering and weaker sales momentum for Diageo. The company has already felt these pressures in fiscal year 2025, with weak consumer confidence in important markets such as the United States and China. Scotch, one of Diageo’s flagship categories, is historically among the most vulnerable when consumers are under financial strain, making it particularly exposed in downturns. On top of consumer behavior, Diageo also faces risks on the cost side. It is heavily exposed to agricultural commodities and raw materials like grain, agave, grapes, glass, and energy. Inflation in these inputs has been significant in recent years, particularly in agave for tequila, and if sustained, this puts pressure on margins. Climate-related factors such as droughts can further disrupt supply and raise costs. While Diageo’s scale allows it to hedge some of this risk and to pass on costs through pricing, prolonged inflation or supply shocks could weigh on profitability.Geopolitics adds another layer of uncertainty. Proposed US tariffs on UK and European imports would represent a material cost for Diageo. Overall, Diageo’s exposure to global consumer trends, input costs, and trade policies means that macroeconomic conditions are one of the most important external risks it faces.

Competition is a risk for Diageo because the alcoholic beverage industry is intensely crowded, with both global giants and smaller craft brands fighting for consumer attention and shelf space. In spirits, Diageo competes directly with other large international players such as Pernod Ricard, Beam Suntory, Bacardi, and Brown-Forman, all of which own strong brands positioned in the same categories. In beer, rivals include AB InBev, Heineken, Molson Coors, Carlsberg, and Constellation Brands. Each competitor invests heavily in marketing, innovation, and distribution, which makes it harder for Diageo to stand out, maintain pricing power, and protect its share of consumer spending. The shift toward e-commerce and digital engagement has added a new layer of competition. Smaller, more agile craft brands have been quick to build a strong online presence, using direct-to-consumer channels and digital marketing to connect with niche audiences. To keep pace, Diageo must increase its own investment in digital platforms and online promotions, which adds pressure to costs and margins. Another challenge comes from consolidation in the retail and distribution sectors. Large retailers and distributors now hold greater bargaining power, which can lead to tougher pricing negotiations or pressure to limit price increases. In extreme cases, products may even be delisted in favor of higher-volume or more profitable alternatives. This dynamic threatens Diageo’s ability to fully pass on rising input costs and can erode profitability over time. Competition is also intensifying because the lines between categories are blurring. Beer and soft drink companies are increasingly entering the alcoholic ready-to-drink (RTD) space, using their existing retail relationships and large marketing budgets to gain quick traction. This creates new rivals outside of traditional spirits and beer companies, increasing the fight for consumer attention and spending.

Changing consumer preferences is a risk for Diageo because cultural and generational shifts are reshaping how people think about alcohol. For decades, the company’s growth has been fueled by rising demand for spirits and beer, but younger generations in particular are approaching consumption very differently. One of the biggest emerging risks is the rise of GLP-1 drugs like Ozempic and Wegovy. These medicines, first developed for diabetes and weight loss, appear to reduce alcohol cravings in many users. If their adoption continues to grow, it could dampen overall demand for alcoholic beverages in a way the industry has never faced before. Early studies suggest this effect may be long-lasting, raising the possibility of a structural decline in consumption over time. At the same time, cannabis is becoming a major substitute for alcohol, especially among younger consumers. Gen Z is adopting cannabis at double the rate of previous generations and is also drinking less alcohol overall. For socializing and relaxation, cannabis is increasingly competing with alcohol, and as legalization spreads, this trend could accelerate. Beyond substitutes like cannabis and GLP-1s, lifestyle changes are another powerful force. Younger consumers are far more focused on health, wellness, and moderation. Many identify as “sober-curious,” drinking less frequently or choosing alcohol-free alternatives. They are also drawn to functional beverages that provide relaxation or energy without the downsides of alcohol. This shift is already visible in industry data, with total beverage alcohol volumes gradually softening over the past decade, and moderation trends expected to continue. For Diageo, whose moat relies on the strength of iconic alcoholic brands, these changing consumer preferences pose a structural risk.

Reasons to invest

Premiumization is a reason to invest in Diageo because the company is directly aligned with one of the strongest long-term trends in the global beverage industry: people are drinking less overall, but they are choosing higher-quality products when they do drink. Instead of focusing on volume or low prices, consumers, especially younger generations, are showing greater interest in craftsmanship, authenticity, and brands that carry cultural meaning. This shift has led to rapid growth in premium and super-premium spirits, which now make up a much larger share of the industry’s value than they did a decade ago, with the highest price tiers growing more than twice as fast as lower-priced segments. Diageo is particularly well positioned to benefit from this trend because of the strength and breadth of its portfolio. Scotch whisky and tequila, two categories where premiumization is especially strong, are among Diageo’s crown jewels, with brands like Johnnie Walker, Don Julio, and Casamigos at the forefront of global demand. In its largest market, the United States, premium and super-premium spirits have been the main growth engine, proving resilient even in periods of economic pressure. Diageo’s portfolio is built around a “price ladder” that allows consumers to trade up within the company’s own brands, from accessible offerings like Johnnie Walker Blonde or Don Julio Blanco to luxury products such as Johnnie Walker Blue Label and Don Julio 1942. This structure ensures that as consumer preferences shift toward higher quality, Diageo captures that growth inside its own portfolio. Premiumization not only drives stronger sales but also higher margins, since premium products carry better profitability. With a strategy focused on building cultural resonance, offering smaller formats for affordability, and expanding premium brands globally, Diageo is well placed to ride this trend for years to come.

Ready-to-drink (RTD) and non-alcoholic products are a reason to invest in Diageo because they align the company with some of the biggest structural shifts in consumer behavior. Younger generations, particularly Gen Z, are entering the alcoholic beverage market differently than previous generations, often starting with spirits-based RTDs instead of beer. RTDs are attractive because they are convenient, pre-mixed, portion-controlled, and often lower in alcohol, making them suitable for occasions like festivals, sports events, and casual social settings. They also allow Diageo to extend its premium brands into new formats, such as the Casamigos Margarita RTD, which strengthens brand visibility and creates new consumption occasions. By linking RTDs to flagship brands like Casamigos and Smirnoff, Diageo can capture growth while reinforcing the value of its core portfolio. Non-alcoholic products are another powerful growth vector. Consumer interest in moderation, health, and wellness is rising globally, and Diageo has established itself as the leading non-alcoholic spirits brand owner, more than four times the size of its nearest competitor. The company recently strengthened its position further with the acquisition of Ritual Zero Proof, the top non-alcoholic spirits brand in the U.S. This gives Diageo a platform to serve consumers who want the flavor and experience of drinking without the alcohol. Importantly, many of these consumers still buy full-strength spirits, meaning non-alcoholic offerings complement rather than cannibalize existing sales. Together, RTDs and non-alcoholic products give Diageo a way to meet consumer needs across more occasions and lifestyles, from moderation and wellness to convenience and portability. They also provide new avenues for growth in categories that are expanding faster than traditional spirits or beer.

Guinness is a reason to invest in Diageo because it combines the strength of a truly iconic global brand with clear momentum in growth, innovation, and profitability. Unlike many beer brands that have struggled in recent years, Guinness has consistently delivered strong growth across its core markets of Great Britain, Ireland, and the US, as well as in Africa. It is not just appealing to its traditional customer base but is also successfully recruiting younger consumers and more women, making the brand increasingly relevant to a wider audience. Innovation has played a central role in this success. Guinness 0.0, the non-alcoholic variant, has quickly become a leader in its category, doubling sales in Europe and becoming the best-selling non-alcoholic beer in the UK. This positions Guinness at the intersection of two major consumer trends: moderation and demand for premium, flavorful experiences. At the same time, other innovations such as Guinness Smooth in Africa have been tailored to local tastes, helping the brand expand its reach in fast-growing markets. Guinness also benefits from an efficient and capital-light business model. Most production is concentrated in Ireland, with partnerships in key markets like Nigeria, meaning Diageo does not need to operate a large network of breweries worldwide. This lowers fixed costs, improves margins, and allows the company to reinvest more in marketing, brand building, and product innovation. Recent investments, such as expanding capacity for Guinness 0.0 and building a new facility in the US, strengthen both supply and sustainability while keeping the model lean. The brand’s heritage and distinctiveness further set it apart. Guinness has long been known for its quality, authenticity, and iconic marketing, and these attributes continue to resonate strongly with consumers. It sits in the premium beer segment, which is growing faster than the overall beer category.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 1,37, which is from fiscal 2025. I have selected a projected future EPS growth rate of 10%. (Finbox estimates EPS to grow by 1,4%, but EPS has grown at 18,5% in the last 5 years). Additionally, I have chosen a projected future P/E ratio of 20, which is twice the growth rate. This decision is based on the fact that Diageo has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of £9,87. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Diageo at a price of £4,94 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 3.131, and capital expenditures were 1.174. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 822 in our calculations. The tax provision was 728. We have 2.222 outstanding shares. Hence, the calculation will be as follows: (3.131 – 822 + 728) / 2.222 x 10 = £13,67 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Diageo's Free Cash Flow Per Share at $0.88 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is £11.07.

Conclusion

I believe Diageo is an intriguing company, though there is some uncertainty given the relatively new management team. The company has built a strong moat through its portfolio of iconic brands, global distribution network, and cost advantages, consistently delivering a high ROIC. While free cash flow is lower than in the past, management expects it to grow again in the coming years. Risks remain, particularly from macroeconomic conditions, as weaker consumer confidence, high inflation, rising interest rates, and volatility in emerging markets can weigh on demand and margins, while geopolitical factors and trade policies add further uncertainty. Competition is also intense, with global players, craft brands, and the rapid rise of RTDs all fighting for market share, making it harder to maintain pricing power and shelf space. Changing consumer preferences present another risk, as younger generations are drinking less, turning to cannabis, and favoring healthier lifestyles, while the growing use of GLP-1 drugs could reduce alcohol consumption further. On the positive side, premiumization remains a powerful long-term growth driver, with consumers choosing higher-quality brands over quantity, and Diageo is well positioned with its strong portfolio in Scotch and tequila. The company also benefits from the growth of RTDs and non-alcoholic products, which align with consumer trends toward convenience, moderation, and wellness, while extending the reach of its flagship brands. Guinness is another key asset, combining global brand strength with consistent growth, successful innovation like Guinness 0.0, and a capital-light model that supports profitability. Overall, there is much to like about Diageo, and if current headwinds prove cyclical rather than structural, buying shares around the Ten Cap price of £13 could be an attractive long-term investment.

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