Interactive Investor

Diageo raises dividend despite pandemic pressures

28th January 2021 11:06

Richard Hunter from interactive investor

Johnnie Walker owner remains popular with investors despite pub and club closures.

Drinks company Diageo (LSE:DGE) may not fully have lived up to its defensive qualities in times of economic stress, but has nonetheless provided grounds for optimism.

The company remains profitable and cash rich, according to its half-year interim results to 31 December. An additional increase to its proud dividend record shows confidence in looking through the current situation to the longer-term growth it previously enjoyed.

Despite the challenges, there are pockets of optimism, not least in its largest market in North America. An increase of 8% in net sales and 9% in operating profit was largely driven by the resilience of consumer demand and the growth of spirits in particular.

Another highlight of future opportunities came from Greater China, where a 15% increase in net sales was underpinned by strong demand for Chinese white spirits and scotch.

In terms of outlook, the current period will be set against some weak numbers from last year as the pandemic took hold, which will boost numbers on a comparative basis.

Meanwhile, the improvement in the net cash and free cash flow positions to £2 billion and £1.8 billion respectively has enabled an increase to the dividend payment. The current yield of 2.5% is not especially punchy, but is nonetheless a feature of the stock in terms of total return.

Elsewhere, conditions are difficult, especially ‘on-trade’, where the closure of outlets such as pubs and clubs has inevitably had an impact. In addition, the severe restrictions on travel have impacted growth, such as in Diageo’s largest segment of scotch, which accounts for 24% of net sales and saw a decline of 8% in the period.

In addition, the debt position and the erosion of operating margins across most brands and geographies will be under continuing pressure in the current environment. In contrast, however, should the post-pandemic world result in the levels of revelry which some are predicting, the benefits and road to recovery would be swift.

The share price performance reflects the current strain on trading, with a decline of 10% over the last year comparing to a drop of 12.2% for the wider FTSE 100. This is despite a 30% recovery in the price since the lows in March, and the immediate outlook is equally challenging.

Even so, Diageo is very much regarded as a consumer staple with long-term growth aspirations, and the market consensus of the shares as a ‘buy’ is indicative of ongoing investor support for prospects.

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