Diageo plc (DEO)

Total return at 5 years: 9.7%/year = 7.9% appreciation + 1.7% dividend. The target price ($130) is ex-dividend; the $9 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $167 · Multiples $112) exceeds the market price ($89).

Today — fairly valued: at $89 trades ~20.9% below its value discounted to today (~$112); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($130) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$71.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($89) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-10.6%/year) than we project (2.8%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$2.1 bn of owner earnings in year 5 (vs ~$4.2 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Utilidad neta atribuible antes de partidas excepcionales (P/E). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Diageo is an annual reporter: it files a 20-F and publishes its interim results on 6-K with no tagged data, so the quarter does not exist in Layer A. Year 0 is therefore the fiscal year ended 30 June 2026, not a TTM (§5 R1 bis, the annual reporter convention). The model's top line is net sales (US$19,643 million in fiscal 2026), not the gross XBRL figure (US$27,762 million), which includes excise duties. The difference of US$8,119 million is collection on behalf of the tax authority and is not business revenue: the five segments add to US$19,481 million and the residual of US$162 million is corporate sales, so the sum closes exactly against net sales. All the model's margins are calculated on that basis. The valuing metric is net income attributable to the parent before exceptional items, the same measure on which the company reports its comparable earnings per share: 165.3 US cents per ordinary share in fiscal 2026 on 2,231 million shares, or US$3,688 million. The attributable figure is valued because the non-controlling interest is material (US$221 million, 11.3% of the consolidated result) and the consolidated figure would include a result that does not belong to the shareholder. Reported earnings for the fiscal year are much lower (78.1 cents) on US$2,527 million of exceptional charges: impairments of brands, goodwill and fixed assets of US$1,489 million, the restructuring program of US$908 million, changes in the distribution model in Japan, Singapore and Thailand of US$75 million and a discretionary increase in pension benefits in Ireland of US$38 million. Year 1 is anchored to the guidance published for fiscal 2027 and not to the trajectory: organic net sales growth practically flat and organic operating profit growth of low to mid single digit, with free cash flow of approximately US$2,000 million after exceptionals. Hence the revenue path starts at zero and recovers toward the 3.0% of year 5, the low band of the consumer staples archetype: it is a trough-and-recovery shape, not a monotonic deceleration, and it is declared as such by invoking the rebound exception to the deceleration rule. The bear case stresses year 1 below the guidance (−2.0%) rather than leaving it flat. Capital investment falls from US$1,612 to US$1,197 million, still well above depreciation and amortization of US$745 million, and the company declares higher capital spending as it invests in Guinness. The split between maintenance and growth uses that proportion: with flat sales, the maintenance portion approximates depreciation and the excess buys brewing and maturation capacity whose revenue arrives with a lag of several years, just like a mining expansion. Cash does not accumulate: the model works at the shareholder level with the debt already charged within earnings via the net financial charge of US$816 million, and the surplus goes to reducing leverage, which fell from 3.4 to 3.1 times net debt to adjusted earnings before interest, taxes, depreciation and amortization, with the company targeting the midpoint of the 2.5 to 3.0 times target range in fiscal 2027. There is no buyback path: the net treasury share transaction for the fiscal year was US$1 million. The dividend was cut from 103.48 to 50.00 cents per ordinary share, an explicit board decision to strengthen the balance sheet.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $130 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $89, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $130 in 5 years plus $9 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $112. Against the current market price ($89), the margin of safety is 20.9% (trades below the maximum → there is margin) and the total return at that price would be 9.7% annually.

• Entry multiple. Trades at 13× on comparable earnings, below the floor of its archetype's band, which implies a modest re-rating in the base case.
• Exit multiple. 16.5 times, near the floor of the 16-to-22 band: it does not rest on an aggressive multiple expansion.
• Estimated return. +10% annually at market price, with +2% contributed by the already-reduced dividend.
• Sensitivity to the archetype. If the business is reclassified as structural decline, the correct multiple falls to the 11-to-14-times band and the value drops roughly a third.

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (102%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Predictable cash generation. Free cash flow of $3,211 million against $2,748 million the prior fiscal year, with stable conversion despite the decline in revenue.
• Sustained return on capital. 13.4% return on average invested capital, above the 10% bar but down from 13.7%.
• Reinvestment runway. Capital expenditure of $1,197 million (1.6 times the $745 million of depreciation), though down from $1,612 million. The company guides ~$3,750 million cumulative over three fiscal years and €400 million to double Guinness capacity at Littleconnell.
• Earnings quality. Distorted by $2,527 million of exceptional items, though the breakdown is published and verifiable line by line.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

This business's drivers are equivalent-case volume and price with mix, which the company reports separately and by region: revenue equals volume times price and mix, so net sales growth can only be judged once it is known which of the two levers produced it. In fiscal 2026 both subtracted at the group level, and in North America the combination was volume of −6.7% with price and mix of −1.7%, that is, lower prices with no volume recovery. Earnings per ADR before exceptional items is the indicator that sums up whether those levers reach the shareholder.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Organic growth. A 2.0% decline in the fiscal year, with volume of −0.4% and price and mix of −1.6 points: both levers subtracted at once.
• Company guidance. Flat organic net sales growth for fiscal 2027 and low-to-mid single-digit organic operating profit growth; for the 2027-2029 horizon the company guides low single-digit sales and mid single-digit operating profit on a compound annual basis, with earnings per share ahead of that at constant exchange rates. The modeled path falls short of that second anchor and the gap is not fully reconciled against the East African Breweries deconsolidation or the currency effect; it is disclosed.
• Replacement engines. Beer with 5% volume, ready-to-drink with 25% and Africa with 13.3% organic: there is growth outside the spirits core.
• Core market. North America fell 8.4% organic and Asia Pacific 8.3% reported, with Greater China retreating 34.9%.

• Ten-year recurrence and relevance. Premium spirits brands have centuries of standing, but the category faces structural consumption moderation.
• Differentiated or generic product. Real brand premium: the 59.5% gross margin is not sustained by a generic product.
• Pricing power. Deteriorated: in North America price and mix subtracted 1.7 points and in U.S. spirits 2.5, with volume falling all the same.
• Market share and trend. The company admits share loss in tequila, with Don Julio and Casamigos falling 19.2% and 27.7% in net sales.
• Operating leverage. With organic sales of −2.0% organic operating profit grew 2.0%: the cost structure responded well to the contraction.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• !Interest coverage (EBIT / interest)7.0x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 102% of ROIC
• !Value creation (ROIC − 10% bar)+3pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.6x
• ✓Float / working capitalFrees up cash $0.1 bn (float / negative WC)
• –Dilution (SBC % of revenue + shares)no data

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. 3.1 times net debt to adjusted earnings before interest, taxes, depreciation and amortization, against a target of 2.5 to 3.0.
• Debt trajectory. Net debt of $20,482 million from $21,854 million: $1,372 million repaid in the fiscal year.
• Interest coverage. Operating profit before exceptional items of $5,683 million against net finance charges of $816 million: seven times coverage.
• Guided cash flow. Free cash flow falls to approximately $2,000 million in fiscal 2027 on the cash cost of the restructuring.

How cash comes in and how it is deployed. In green, the business's own cash (the owner-FCF it generates and reinvests); in gray, the float and credit — customer and funding money, which is not the shareholder's.

Breakdown of fiscal 2026 cash use per the cash flow statement: capital expenditure of $1,197 million, dividends paid to parent shareholders of $1,846 million (plus $164 million to the non-controlling interest) and net debt repayment of $1,372 million. The dividend paid in the fiscal year still corresponds to the pre-cut rate, announced alongside these results; the new rate of 50.00 cents per ordinary share takes effect from fiscal 2027. Buybacks were essentially nil, with a net treasury-share transaction of $1 million.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Capital allocation. A 52% dividend cut and $1,200 million into restructuring to lower leverage: it prioritizes the balance sheet over immediate returns, a defensible call at 3.1 times.
• Candor. The report discloses the share loss by brand and by category, and acknowledges the impairments with their full breakdown; it does not gloss over the fiscal year.
• Continuity. New chief executive since January 1, 2026, after a half-year interim period: the plan does not yet have a track record of execution.
• Acquisitions. The previous tequila-brand buying cycle ended in impairments; the current cycle is one of divestiture, with East African Breweries announced.

• Motivated sellers: the dividend cut from 103.48 to 50.00 cents per ordinary share drives out the income-focused holder base that bought the stock for its yield, and that selling responds to the payout policy, not to the value of the business.
• Motivated sellers: the $2,527 million of exceptional charges sank reported earnings to 78.1 cents from 105.9, so the multiple on the accounting figure appears to be little more than double the one that applies to comparable earnings (roughly 30 times against roughly 14).
• Missing buyers: the entire alcoholic beverage sector trades under the narrative of secular contraction from consumption moderation and weight-management medications, and capital exited the category before it exited the company.
• Leadership transition: Sir Dave Lewis took over as chief executive on January 1, 2026, after a half-year of interim leadership, and the market does not credit a plan until it sees it executed.

The discount has an identifiable, positive source; it is not an absence of explanation. The investor day was held on August 6, 2026, and its content -the new strategy, the operating framework and the FY27-to-FY29 guidance- is already reflected in the base. The post-close events left out of the base are the sale of East African Breweries and the Kenya spirits business to Asahi for approximately $2,300 million, and the sale of the stake in the Royal Challengers Bengaluru cricket team, both expected to close in the second calendar half of 2026.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +2%/year (+9% total): the margin of safety protects the downside. The bull (+16%/year, +113% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Category contraction. Consumption moderation, weight-management medications and low-alcohol beverages as substitutes, listed by the company itself.
• Tariffs. Already compressed the fiscal year's operating margin and affect a supply chain with legally rigid geographic origin.
• Hyperinflationary markets. The $786 million impairment on Türkiye shows the scale of exposure to devaluation and exchange controls.
• Tax litigation. Brazil has a known aggregate exposure of up to $1,032 million unprovisioned (note 19(f), a critical audit matter); India and East Africa are not quantified.
• Water stress. More than a third of sales value is exposed to high or very high water stress, and water is the primary ingredient.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: wide moat, eroding.

• Peter Lynch Growth at a reasonable price (GARP)

  A slow grower growing 3% at a PEG of 4.8 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 11% (EBIT/EV) + ROIC 13% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -11% vs our 3%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -0%/yr, bull-scenario ceiling +15%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, eroding; sources: intangibles, efficient scale, cost advantage → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -11%, within what we project (3%) — the story squares with the numbers.