Interactive Investor

Diageo keeps famous fan club happy with these results

1st August 2023 15:56

by Graeme Evans from interactive investor

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It has a fantastic track record, and the new boss is confident the Guinness owner has a cellar full of future growth opportunities.

Captain Morgan rum Diageo brand 600

The view of Diageo (LSE:DGE) as a quality stock for the long term was undiminished today after the Guinness maker delivered results bang in line with medium-term guidance.

London-listed Diageo, whose supporters include the legendary stock picker Warren Buffett, revealed annual net sales growth of 6.5% and organic operating profit up 7%.

The world’s biggest spirits maker pointed to the 15 basis point expansion in operating margin as an example of its ability to deliver resilient performances even in challenging times.

New chief executive Debra Crew expects the cost and other pressures to continue but has vowed to move with “greater speed and agility” to ensure another year of sales growth in the target range of 5% to 7% and operating profit of between 6% and 9%.

The performance in the current year to 30 June is likely to be second-half weighted, however, as Diageo faces up to tougher comparatives.

Crew said Diageo’s prospects were underpinned by favourable trends such as population growth, increased spirits penetration and resilience in premiumisation globally.

She added: “I see a long runway of future growth opportunities for Diageo to go after with our winning strategy. And, I firmly believe we have an advantaged portfolio to capitalise on, to drive sustainable long-term growth and generate value for shareholders.”

Diageo, whose brands include Captain Morgan rum, is due to pay a dividend of 49.17p a share on 25 August, with the 5% growth in the financial year’s 80p more than twice covered after earnings rose 17.6% to 164.9p.

This will be the last dividend in sterling as Diageo intends to report future results in US dollars to reflect the currency under which it generates an increasing level of sales and expenses.

About 40% of Diageo’s £17 billion of net sales and 55% of its operating profit came from North America in the last financial year. Net sales in US spirits declined 1% in the last year, but this was better than City expectations amid tough comparisons to the double-digit growth the previous year.

In Britain, market share gains by Guinness and strong performance by tequila, vodka and ready-to-drink products meant net sales grew by 7%.

Bank of America said the results should provide some reassurance in the face of currency headwinds and slowdowns in some emerging markets.

The bank reiterated its “buy” recommendation and price target of 3,800p, which compares with 3,387p seen after today’s results. The company trades on 21 times forward earnings, a 9% premium to the consumer staples sector.

Diageo is the third-largest stock in Nick Train’s Finsbury Growth & Income (LSE:FGT) Trust, alongside the likes of RELX (LSE:REL), London Stock Exchange Group (LSE:LSEG) and Burberry Group (LSE:BRBY).

In the current economic conditions, Train said recently that Diageo offered a “rare and valuable combination” of inflation protection and secular growth.

Despite slowing sales in North American, he believes it is hard to argue against the fact that selling premium spirits brands to the US consumer is not structurally a great category to be in.

Train told investors earlier this year: “I think Diageo is an ideal investment to hold in any economic circumstances and forever.”

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