Diageo: Has the market overreacted to the dividend cut?
Published: 06:08 26 Feb 2026 EST
The spirits giant slashed its payout and warned of another year of margin pressure, but two major brokers argue the sell-off has left the stock looking cheap
Diageo PLC (LSE:DGE) shares have fallen around 14% in the day-and-a-half since the world's largest premium spirits company cut its dividend by half and signalled a further round of margin compression in the year ahead. Both Citi and RBC Capital Markets held their buy-equivalent ratings, with each suggesting the market has overreacted.
The dividend cut was the headline shock. RBC reduced its dividend forecast by around 40%, while Citi described the 50% reduction as having "rightly weighed on the stock" before concluding the scale of the sell-off looked overdone.
The concern now is mechanical: income funds that held Diageo for its yield may be forced sellers in the near term, adding pressure to a stock that has already fallen sharply from its peak.
On the underlying business, both brokers expect organic revenue to contract around 2-3% in the current financial year, in line with management's own guidance, before returning to modest growth in 2027.
The tougher challenge is at the profit line. New chief executive Sir Dave Lewis has flagged the need to reinvest across the entire value chain to restore competitiveness, particularly in the mainstream segment where Diageo has lost ground.
RBC forecasts an EBIT margin decline of 210 basis points in 2027, while Citi sits below management's flat-to-modest-growth guidance for operating profit this year.
The longer-term case, both brokers argue, remains intact. Citi kept its 'buy' rating with a revised £22 price target, down from £24.25. RBC maintained its 'outperform' rating at £20. At current levels around £18.74, both see meaningful upside once expectations finish resetting and the new strategy takes shape.
