Diageo Shares Tumble as Guidance Cut, Dividend Rebased

Diageo (LON: DGE) shares are under pressure on Wednesday, down over 6%, following the release of its interim results for the six months ended December 31, 2025, which included a lowered outlook for fiscal year 2026 and a significant cut to its interim dividend.

The announcement has impacted investor confidence, prompting a sell-off as markets digest the implications for future shareholder returns and the company’s growth trajectory.

Reported net sales decreased by 4.0% to $10.46 billion, impacted by both organic net sales decline and disposals. Organic net sales themselves fell by 2.8%, a result of a 0.9% decrease in volume and a negative price/mix of 1.9%. Operating profit also took a hit, declining 1.2% to $3.116 billion, despite an 85 basis point increase in operating profit margin to 29.8%.

The company’s decision to rebase its dividend policy has particularly rattled markets. The interim dividend has been slashed to 20 cents per share, compared to 40.50 cents in the prior year. This move is part of a broader strategy to increase financial flexibility and reduce leverage, with a new payout policy targeting 30-50% of earnings, while setting a minimum dividend floor of 50 cents per annum.

Net cash flow from operating activities decreased by $202 million to $2.1 billion, and free cash flow declined by $164 million to $1.5 billion. Diageo’s net debt stood at $21.7 billion as of December 31, 2025.

However, the pending sale of its stake in East African Breweries plc and its Kenyan spirits business to Asahi Group Holdings is expected to generate $2.3 billion in net proceeds and reduce the net debt to adjusted EBITDA ratio by approximately 0.25x upon completion in the second half of calendar year 2026.

Growth in Europe, Latin America and the Caribbean (LAC), and Africa was unable to offset weakness in North America and China.

The North American performance was impacted by pressure on disposable income affecting US Spirits, while the Chinese white spirits (CWS) market continued to present challenges in Asia Pacific. Excluding CWS, organic net sales would have been approximately 2% higher, with volume down approximately 0.5% and price/mix broadly flat.

Diageo has updated its fiscal 26 guidance, now expecting organic net sales to decline by 2-3%, taking into account further weakness in the US and the impact of Chinese white spirits.

Organic operating profit growth is now projected to be flat to up low-single-digit, reflecting the revised net sales guidance and the impact of tariffs, although this is partially offset by savings from the Accelerate programme. The company reiterated its free cash flow guidance of $3 billion.

The cost savings programme, Accelerate, is progressing well, with approximately 50% of savings expected in fiscal 26. These savings are driven by supply chain agility, A&P efficiencies, and overhead reductions.

Chief Executive Officer Sir Dave Lewis commented, “Our performance in the first half of fiscal 26 was mixed. Strong performance in Europe, LAC and Africa, was offset by a weakening performance in NAM and continued weakness in Chinese white spirits in APAC. US Spirits performance reflected pressure on disposable income, and competitive pressure from more affordable alternatives addressing a more stretched consumer wallet.”

The Board has decided to reduce the dividend to a more appropriate level to accelerate the strengthening of the balance sheet and create more financial flexibility. This will also ensure that decisions made are taken for the long-term best interests of the company.

The Board is targeting a 30-50% payout policy going forward which will enable Diageo to balance investment in the business with attractive shareholder returns through dividends and where appropriate share buybacks.