Diageo share price crashed after dividend cut: to buy, hold, or sell?

The Diageo share price suffered a harsh reversal this week, making it one of the worst-performing companies in the FTSE 100 Index. It plunged to a low of 1,585p on Wednesday, its lowest level since January 9 as the company reported weak financial results and slashed its dividend. So, is it safe to buy the dip or sell the rip?

Diageo, the company behind popular brands like Guinness and Smirnoff, reported weak financial results as the alcoholic beverage industry faces major headwinds. Its results mirrored those of other companies in the industry like Boston Beer and Constellation Brands.

Diageo’s results showed that its net sales dropped by 4% in the six months to December 31st. Its revenue fell to $10.5 billion, with growth in Europe, Latin America, and Africa offset by more weakness in its key North America and Chinese markets.

These results confirmed the view that beer consumption continued falling in the United States and other key markets. Data shows that US beer production and consumption fell by 1% in 2024, a trend that continued last year.

The company’s business was also affected by Donald Trump's tariffs, which affected some of the brands it makes in Europe.

Diageo's results showed that the company's reported operating profit dropped by 1.2%, while its organic operating profit margin fell by 2.8%.

It also lowered its guidance and now expects that its sales slowdown will continue this year and drop by 2-3% this year as the US market weakens.

It is against this backdrop that the company, under Dave Lewis, decided to cut its dividends and accelerate its cost cuts. It now expects to have a payout ratio of between 30% and 50% as it continues to improve its dividend.

The company has continued exiting some key markets to improve its balance sheet. For example, it will receive over $2.3 billion later this year after selling its Kenyan operations.

Therefore, the question among investors is whether it is safe to buy the dip or short the company. The case for shorting the company is the view that its business will continue to deteriorate in the coming months and years as beer consumption falls and competition in key markets rise.

On the other hand, the case for buying the company is that the worst has already happened now that it has already slashed its dividend and issued weak guidance. In the past, some companies have thrived after slashing their dividends.

Diageo stock price technical analysis

The weekly timeframe chart shows that the Diageo stock price has been in a strong downward trend, moving from 3,670p in 2022 to the current 1,616p. It has formed a descending channel and is now slightly above the lower side.

The stock has remained below all moving averages, while the Relative Strength Index (RSI) has retreated and moved below the neutral point level.

Therefore, based on trend-following, the most likely scenario is where it continues falling, potentially to the key support level at 1,000p. This view will be confirmed if it moves below the lower side of the channel.

In the future, however, the stock will likely bounce back as investors wait for the impact of turnaround.