Every time it looks like things couldn’t get worse for Diageo (LSE: DGE) shares, they invariably do. It’s been that way since the FTSE 100 spirits giant issued a shock profit warning in November 2023, due to falling sales in Latin America and the Caribbean. The share price plunged and has been sliding ever since. At some point, that surely has to end. But when?

Diageo was long seen as one of the most reliable blue-chips. Its recent struggles are a reminder that no stock is completely safe. The ups and downs are the price investors pay for the superior long-term returns from equities.

Long-term blue-chip troubles

Those prepared to stay invested may be rewarded, but patience is essential. Diageo has faced a series of setbacks since that first warning. The cost-of-living crisis has pushed consumers towards cheaper types of firewater, denting demand for its carefully honed portfolio of premium brands. This trend has spread across major markets including China, Europe and the US.

Tariffs have also hurt exports of Mexican tequila and Canadian whisky to the US. The death of long-standing chief executive Ivan Menezes, followed by the short tenure of Debra Crew, didn’t help. Diageo also faces longer-term questions over changing drinking habits among younger consumers and the impact of weight loss drugs. Given all that, the obvious question is why anyone would invest at all.

Well I have. I bought after the original dip, and have averaged down on several occasions. So far to little avail. But consumer stocks like this one tend to be cyclical, they rise and fall with economic conditions. At some point, the sell-off will overshoot and with luck the shares will snap back. That’s my theory.

Diageo still owns a formidable portfolio of global brands, including Smirnoff, Baileys, Guinness, Tanqueray and Johnnie Walker. It also has a new chief executive in Dave Lewis, who turned around Tesco during a difficult period. He’s reset expectations and is pursuing asset sales to reduce debt.

The Iran war is the latest setback. Diageo is down 13.5% over the past month, amid concerns that another inflation surge will further batter consumer demand. Over one year, the shares are down 32%, and 61% over three years.

Beware the headline yield

The valuation now looks more attractive. The forward price-to-earnings ratio is around 12, roughly half historic levels. As the share price has fallen, the dividend yield has risen. The trailing yield stands at 5.7%, which may tempt investors to buy before the shares go ex-dividend on 16 April. Beware: that figure is misleading. Lewis recently cut the dividend in half. Forecasts now suggest more modest yields of 2.9% next year and 3.1% in 2027.

That weakens the income case. The investment argument rests more on Diageo’s recovery potential. It should respond if trading stabilises and management delivers progress. But we may have to wait until the war is over and the economy has started to recover. Which could be some time.

I think Diageo is worth considering, despite its troubles, but only with a long-term view. I’d suggest feeding money in rather than committing capital all at once. Things could still get worse before they get better.