Interactive Investor

ii view: Diageo demonstrates why it is world-class

Sales up, profit up, dividend up. We assess prospects for this global drinks giant.

1st February 2022 10:57

Keith Bowman from interactive investor

Sales up, profit up, dividend up. We assess prospects for this global drinks giant. 

First-half results to 31 December

  • Net sales up 15.8% to £8 billion
  • Operating profit up 22.5% to £2.7 billion
  • Interim dividend up 5% to 29.36p per share
  • Completed £0.5 billion of £4.5 billion share buyback programme

Chief executive Ivan Menezes said:

“This performance demonstrates our world-class brand building capability, supply chain excellence and agile culture, and reflects the strength of our portfolio across geographies, categories and price tiers.”

“We have made a strong start to fiscal 22. While we expect near-term volatility to remain, including potential impacts from Covid-19, global supply chain constraints and rising cost inflation, I am confident in our ability to successfully navigate these disruptions through the remainder of the year.”

ii round-up:

Diageo (LSE:DGE) is the world's largest premium spirits company with an estimated 30% share of the global premium spirits market. 

Around four-fifths of its sales come from spirits, with just under a fifth from beer including Guinness, and a small balance from the ready-to-drink market. 

For a round-up of these latest results, please click here.

ii view:

Diageo was formed back in 1997 when Grand Metropolitan and Guinness agreed a merger. Today its products are sold in more than 180 countries. Its brands include Johnnie Walker whiskey, Smirnoff vodka, Captain Morgan’s rum, Gordon’s gin, Don Julio tequila and Baileys liqueur. It also owns a 34% stake in Moët Hennessy and 55% of United Spirits in India. 

For investors, the rising cost of living for its customers globally could eventually see spending on its products crimped or sacrificed for more essential items. Uncertainty regarding the pandemic is not over either, and supply chain challenges persist. Alcohol could also prove a potential target for financially Covid stretched governments to raise duty taxes going forward.  

That said, Diageo is arguably running a sensible balance between pricing and market share gains, between brand investment and cost savings and between capital expenditure and share buybacks. An estimated forward price/earnings ratio in the mid-20s does not look excessive compared to rivals and the 10-year average. While a forecast yield of around 2% and a record of more than 15 years of consecutive annual dividend increases is not to be forgotten. In all and given a firm record of steady growth, Diageo looks to remain worthy of a place in long-term portfolios. 

Positives: 

  • Stable of diverse and well-known drink brands
  • Over 15 years of consecutive dividend increases

Negatives:

  • Uncertain Covid and economic outlook
  • Exposure to currency risk

The average rating of stock market analysts:

Buy

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