Diageo slashes guidance as US-China weakness forces dividend cut

Diageo shares fell sharply after the $55 billion spirits maker slashed its full-year guidance and announced a significant dividend reduction, marking a challenging debut for new chief executive Sir Dave Lewis as weak demand in the United States and China continues to weigh on the world's largest producer of alcoholic beverages.

The London-based company now expects fiscal year 2026 organic net sales to be flat to slightly lower, downgrading its previous outlook. Organic operating profit growth is forecast at low to mid-single digits, a substantial revision from earlier projections. The guidance cut follows a disappointing first-half performance, with net sales declining 4% and organic sales down 2.8% for the period ending December 31.

In a move underscoring the severity of the demand slowdown, Lewis announced a dividend rebase to a 30-50% payout ratio with a minimum annual floor of 50 cents per share. The interim dividend was halved to 20 cents per share from 40.5 cents a year earlier. The new policy represents a significant shift for a company that had maintained consistent dividend growth through previous market cycles.

"The US market has proved more challenging than anticipated, with consumers continuing to trade down and de-stock inventory," Lewis said in a statement accompanying the results. "China remains subdued, and while other regions show resilience, the overall environment requires decisive action."

North America, Diageo's largest market, experienced a particularly pronounced downturn, with tequila sales declining more than 23% as consumers retreat from premium spirits amid economic uncertainty. The company's Crown Royal Canadian whisky and Smirnoff vodka brands also reported volume declines. In China, sales of premium spirits weakened as slowing economic growth and anti-corruption measures continue to dampen corporate entertainment spending.

Lewis, who took the reins in November 2025, moved quickly to restructure the business. The company announced plans to advance $2.3 billion of asset sales, including its shareholdings in East African Breweries and its Kenyan spirits business. The divestments are expected to complete in the second half of calendar year 2026, with proceeds earmarked for debt reduction.

The veteran executive, nicknamed "Drastic Dave" for his cost-cutting tenure at Tesco, also unveiled plans to achieve $625 million in savings over three years through efficiency improvements and organizational simplification. The restructuring will include reductions in management layers and a renewed focus on the company's highest-margin brands.

"We are fundamentally reshaping Diageo to be more agile and better positioned for sustainable growth," Lewis told analysts on a conference call. "This includes making tough decisions about our portfolio and our cost structure to ensure we emerge stronger."

Analysts responded with caution to the guidance cut, though several noted that the dividend reduction, while painful for income investors, had become increasingly necessary given the company's leverage position and weakening cash generation. The average 12-month price target for Diageo ADR stands at $105.57, according to consensus estimates, with ratings split among eight analysts including strong buy, buy, hold and sell recommendations.

The shares trade at 23.7 times trailing earnings, a premium to the broader consumer staples sector, reflecting the company's historical reputation for steady growth and reliable dividends. The guidance cut represents a second consecutive downward revision, following Diageo's decision in February 2025 to withdraw its medium-term guidance of 5-7% organic top-line growth amid concerns over potential US tariffs on imports from Mexico and Canada.

Diageo's portfolio includes Johnnie Walker whisky, Guinness beer, Tanqueray gin, and Casamigos tequila, among more than 200 brands sold in more than 180 countries. The company faces intensifying competition in the premium spirits segment, while also navigating macroeconomic headwinds including persistent inflation and shifting consumer preferences away from at-home alcohol consumption in some markets.

Lewis outlined a strategy focused on strengthening Diageo's core brands while exiting underperforming categories and geographic regions. The company will prioritize innovation in its whiskey and tequila portfolios, which generate the highest margins, while streamlining marketing spend across the broader brand portfolio.

"The next 12-18 months will be about execution and rebuilding confidence," Lewis said. "We have the right brands, the right people, and now the right strategy to navigate this transition and return Diageo to sustainable growth."

Investors will be watching closely for signs of stabilization in US demand when the company reports third-quarter results in the coming months, with particular attention to inventory levels across the retail channel and any improvement in the critical tequila category. The successful completion of planned asset sales and progress on the cost-cutting program will also be key metrics for evaluating Lewis's turnaround efforts.