ii view: cost savings spearhead recovery plan at Diageo

Full-year results to 30 June

• Net sales down 2% to $19.64 billion (£14.5 billion)
• Operating profit including exceptional items down 27.2% to $3.16 billion
• Operating profit excluding exceptional items up 2% to $5.68 billion
• Final dividend of 30 US cents per share
• Total dividend for year of 50 US cents per share, down from 103.48 cents in 2025
• Average net debt of $21.68 billion, up from $21.54 billion in the previous year

Guidance:

• Expects flat net sales for the full year
• Expects low to mid-digit percentage growth in annual operating profit

Chief executive Sir Dave Lewis said:

“The revised operating framework is being rolled out across Diageo and the changes are significant. In 2026 this change incurs a cost of $0.8 billion (c.70% of the total cost of the two-year programme) with savings realised over 2 years starting in fiscal 27. These savings will allow us to invest in the turnaround without needing to reduce operating profit.”

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ii round-up:

Diageo (LSE:DGE) is the world's largest premium spirits company with an estimated 20% share of the global market.

Spirits generated most sales over this latest financial year at 78%, followed by beer at 18% and pre-mixed or ready-to-drink (RTD) products the balance of 4%.  

Spirit brands include Johnnie Walker whiskey, Smirnoff vodka, Captain Morgan rum, Don Julio tequila and Bailey’s cream liqueur. Beer sales come largely from Guinness, with RTD products including canned cocktail formats of Gordon's, Tanqueray, and Captain Morgan.

For a round-up of these latest results and strategy update announced on 6 August, please click here.

ii view:

Employing around 28,000 people, Diageo products are sold in almost 180 countries. Geographically, the USA accounted for most sales over this latest fiscal year at 27%. That was followed by India at 12%, the UK 11%, and the rest of the world the balance of 50%. Competitors include Pernod Ricard SA (EURONEXT:RI), Anheuser-Busch InBev SA/NV (EURONEXT:ABI) and Remy Cointreau (EURONEXT:RCO).

For investors, pressured consumer spending, particularly in its largest country market the USA, is likely pushing customers to downgrade to cheaper alternative brands. Changing drinking habits and consumer moderation are also likely Having an impact. A targeted dividend payout ratio of 30-50% of earnings is down from last year’s 63%, while US trade tariffs and alcohol restrictions in China remain additional headwinds.

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On the upside, a turnaround plan now includes targeted cost savings of $1 billion over the next three years. Sales away from North America and Asia Pacific increased over this latest financial year, including a 13% gain in Africa. A previous decision to rebase the dividend generates increased financial flexibility and opportunity for investment, while group average net debt of $21.68 is little changed from the prior year. 

In all, changing drinking habits and pressured consumer spending cannot be ignored. That said, a transformation plan and consensus analyst fair value estimate close to £20 per share look to give grounds for longer-term hope.

Positives:

• Stable of diverse and well-known drink brands
• Renowned recovery chief executive

Negatives:

• Uncertain economic outlook
• Exposure to currency risk

The average rating of stock market analysts:

Buy