Fitch revises Diageo’s outlook to negative amid leverage concerns

Investing.com -- Fitch Ratings has revised Diageo plc’s outlook to negative from stable while affirming its Long-Term Issuer Default Rating (IDR) at ’A-’, the rating agency announced Tuesday.

The negative outlook reflects expectations that Diageo’s leverage will remain elevated above levels appropriate for its current rating over the next two years. The company ended FY25 (financial year to June) with high indebtedness amid weak macroeconomic conditions and low consumer confidence.

Fitch projects that Diageo’s net leverage will exceed 3.0x in FY26 and FY27, after peaking at 3.6x in FY25. This leaves the spirits maker with limited headroom to absorb additional market risks. The rating agency forecasts deleveraging toward 3x by FY28, supported by EBITDA growth, improved working capital management, and completion of the investment cycle.

Despite these concerns, Fitch affirmed Diageo’s ’A-’ rating, citing its strong business profile as the world’s largest international spirits producer with leading market shares across regions and ability to drive organic sales growth through channel and brand portfolio management.

Diageo’s commitment to a disciplined financial policy will be crucial for maintaining its current rating. The company previously demonstrated this approach by suspending share buybacks during the pandemic until leverage returned to its target range of 2.5x-3.0x.

Fitch expects limited organic revenue growth in FY26 due to weak consumer sentiment in key markets, with only modest support from accelerating premiumisation trends. From FY27, organic sales growth is projected to accelerate toward mid-single digits as consumer confidence gradually improves.

The rating agency forecasts flat EBITDA margin in FY26 at about 30%, with profitability gradually recovering toward 31% by 2028. US tariffs are estimated to impact the company by $100 million.

Free cash flow margins are expected to recover to 2.3% in 2026 from 0.6% in FY25, driven by working capital efficiencies and capex normalization, with further improvement to 3%-4% by FY27.

Diageo maintains the highest rating among Fitch-rated alcoholic beverages peers, including Pernod Ricard, Bacardi Limited (BBB-/Stable) and Becle, S.A.B. de C.V. (BBB/Stable).

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