Shares in Diageo (LSE:DGE) is down 12.5% ​​today (February 25). FTSE100 the company announced a 50% dividend cut. I’m a shareholder, so what should I do with my investment now?

Warren Buffett says it’s never good for a company to cut its dividend. However, in some cases it may be the right decision and I think that is the case here.

No surprise

The share price reacted sharply to the latest news. In doing so, he reversed virtually all of the gains he had made since Sir Dave Lewis took control.

However, I believe that investors should not be surprised. In December, I said I was planning a potential dividend cut and suggested that other investors might want to do the same.

One reason is that it’s not uncommon for a recent CEO to want to start from scratch, especially when things change. Cutting the dividend was one of the first things Lewis did Tesco.

Since then, reports have emerged that Diageo intends to sell some of its non-core assets to raise cash. However, doing this while also sending out cash in the form of dividends would be an odd exploit of capital.

Strategic perspective

In addition to the dividend cut, Diageo announced plans to focus on being more price competitive. This will likely result in lower margins, but we hope that the enhance in volume should compensate for this.

The U.S. spirits market is stable, with withering sales due to failures against competitors. However, I am cautious about changing strategy in the current environment.

The situation in the US is that inequality is getting worse. Low-income households face increasing budget pressures, while higher-income households are generally relatively resilient.

In such an environment, trying to enhance the mass market appeal of Diageo’s products seems risky to me. This involves moving away from the company’s identity as a company focused on premium products.

What am I doing?

A dividend cut could be unfavorable to investors looking for income over the next few years. However, from a long-term perspective, I believe this move is the right one for the company.

While I’m not entirely convinced about the change in strategy, Diageo has some key strengths that could make this approach successful. One of them is the scale of its distribution.

Generally speaking, companies that want to compete on price need some way to reduce their own costs. Economies of scale are a really good example of this.

Therefore, I am cautiously bullish about the company’s future. So I plan to hold my shares for now and see how things go.

No sales

I fully share Diageo’s decision to cut its dividend. I thought for a while that this might have been in the plans and I think it was the right decision.

However, I am less convinced about the shift towards price competition. However, at today’s prices I think the offer is good and therefore I do not intend to sell after today’s announcement.