Interactive Investor

Diageo's latest results are worth celebrating

27th January 2022 08:07

Richard Hunter from interactive investor

Stock markets are lower today, but investors are ordering up drinks giant Diageo following these half-year results. Our head of markets explains why.

Diageo (LSE:DGE) has again proved its worth as a core portfolio constituent, with a half-year performance which has underlined both its pricing power and its ongoing growth potential.

Cost inflation has been the subject of much debate in corporate boardrooms, but Diageo benefits from the nature of the sector in which it operates. Its ability to pass on price increases, as well as ongoing productivity savings, has more than offset such inflation, with its move towards “premiumisation” providing additional insurance.

Indeed, the general growth of spirits as a percentage of total consumption has played into Diageo’s medium-term strategy. Its premium plus brands contributed 56% of net sales for the group during the six months to December and 74% of the net sales growth. An evolving middle class in many of the emerging markets has boosted sales, while the current penchant for new and exotic spirits is something on which the likes of Diageo can continue to capitalise.

By geography, there was a marginal improvement in the company’s largest market of North America, while there were also outsize gains emanating from Europe, Africa and Latin America. The geographical diversification of the business adds another string to Diageo’s defensive bow, particularly given the differing global rates of recovery.

At a group level, the figures are equally impressive, with net sales growing by 15.8% for the period, operating profit by 22.5% and operating margin by 1.9%. Earnings per share also spiked sharply higher by 24.7%, while strong cash generation enabled further marketing and capital investment, £500 million of share buybacks and an extension to the company’s proud record of dividend growth, with a 5% increase.

Despite tough comparatives to come in the second half, Diageo’s outlook is also upbeat, with net sales momentum expected to continue, bolstered by the recovery in the on-trade business and, restrictions permitting, a further return to normality within the Travel Retail business.

There will continue to be hurdles to negotiate, both within and outside of the company’s control. The effects of the latest Covid variant are still being felt to differing degrees, supply chain blockages have yet to ease and inflation has yet to be contained from a global perspective. Added to the impending round of tougher comparatives in the second half, the company will need to maintain the momentum provided by the first.

The share price has tended to reflect the company’s strength, agility and defensiveness, having risen by 25% over the last year, as compared to a hike of 14% for the wider FTSE100.

Diageo is very much regarded as a consumer staple and a building block of most portfolios, and the market consensus of the shares as a "buy" is indicative of ongoing investor support for prospects.

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