How long will Diageo's recovery take after this profits hit?
A recent profit warning stunned the market and these half-year results have done nothing to restore confidence. ii's head of markets runs through the numbers.
30th January 2024 08:41
by Richard Hunter from interactive investor
Share on
![Captain Morgan rum Diageo brand 600](https://media-prod.ii.co.uk/s3fs-public/2023-08/pirate.jpg)
All is certainly not lost at Diageo (LSE:DGE), but the performance in Latin America and the Caribbean has left a bitter taste in the mouth, from which it may take some time to recover.
The profit warning in December was a shock for investors which led to a sharp decline in the share price. Latin America and the Caribbean (LAC) was held up as the main culprit, where net sales declined by 23% in the six months to 31 December.
Despite only accounting for 10% of overall sales, the shockwaves for the group were immediate and impactful. Diageo has pointed out that part of the decline arose from strong comparatives, but lower consumption and a tendency among consumers to trade down to cheaper alternatives is the main concern of potential problems to come.
- Invest with ii: Open a Stocks & Shares ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA
Unsurprisingly, the group has recognised the damage and will take steps in the second half of the year to mitigate the situation. Inventory levels will be reduced to more appropriate levels and, although the decline is expected to continue, it should be at a lower rate. Consumer sentiment shows no immediate signs of improvement and so the group will need to cut its cloth accordingly.
Elsewhere, the group’s strength and geographical diversification has been able to pick up some of the slack. The group’s largest region accounting for 37% of net sales is North America, which saw a decline of 2% but where sequential improvement continues, which should help the group back on the growth path.
Other regions fared rather better, with Europe contributing sales growth of 3% (responsible for 23% of overall sales), Asia Pacific 6% (20%) and Africa 9% (9%).
Net sales overall fell by 1.4% to $11 billion, driven by the LAC performance and an unfavourable foreign exchange impact. By way of comparison, excluding LAC, there was sales growth of 0.7%. Operating profit also fell by 11.1% to $3.3 billion, while the profit margin dipped by 3.29%.
Overall, some of the margin loss was offset by passing on price increases, but the salutary lesson of LAC was one of the factors which spooked investors, with customers potentially becoming more selective in their purchases, as has been seen recently to some extent in the luxury goods sector.
- The Week Ahead: Diageo, GSK, Shell, BT
- Diageo ditched in favour of cola and lager stocks
- Nick Train analyses his trust and names the stock he’ll buy more of
Rather more positively, Diageo remains a cash generative giant which will withstand the LAC hit, however painful in the shorter term. Free cash flow of $1.5 billion was helped along by some $335 million of cost savings, with the group’s medium term plan announced of $2 billion dollars of productivity improvement over the three years between 2025 and 2027. Even with these savings, the group plans to maintain its significant marketing presence and to continue with the “premiumisation” of its products, leaning towards higher margin sales.
The cash generation also enabled the completion of $500 million of the intended $1 billion share buyback programme, while the dividend was increased for the umpteenth year by 5%, keeping the group’s progressive policy intact. The yield of 2.8% is not one of the stock’s major attractions, rather it forms part of the wider shareholder returns approach.
Diageo has tended to be a typical core constituent of many portfolios, given the undoubted quality of its brands, diversification in terms of price point and regions, and strong and stable growth which has resulted from its many offerings.
The LAC performance has blotted its copybook, with the share price decline all but wiping out any progress made during the pandemic and since.
- 2024 Investment outlook: share tips, forecasts, tax, pensions and savings
- 10 shares to give you a £10,000 annual income in 2024
- 10 hottest ISA shares, funds and trusts: week ended 26 January 2024
The shares are now down by 17% over the last year, as compared to a dip of 2% for the wider FTSE100 index and the initial price reaction to this release reflects the fact that the need for recovery remains live and pressing.
Perhaps slightly more positively, the market consensus of the shares as a 'hold' suggests that investors are playing the waiting game for the time being, hoping for some of the current clouds to clear.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.