ii view: Diageo investors swallow lower sales forecast

Trade tensions between the EU and the US overshadow these numbers, so where now for investors?

Half-year results to 31 December 2019

• Net sales up 4.2% to £7.2 billion
• Reported operating profit up 0.5% to £2.4 billion
• Interim dividend payment up 5% to 27.41 pence per share
• Returned £1.1 billion to shareholders via share buybacks

Guidance:

• Expect organic net full-year sales growth towards lower end of 4 to 6% range
• Continue to forecast organic operating profit to grow roughly 1% ahead of organic net sales

Chief executive Ivan Menezes said:

"Diageo has delivered another good, consistent set of results in the first half, with broad based organic net sales growth across regions and categories. We have continued to increase investment behind marketing and growth initiatives, while expanding organic operating margins.

“These results reflect the changes we are making in the business to drive shifts in our culture. They are in line with our current mid-term guidance and have been delivered in the face of increased levels of volatility in India, Latin America and Caribbean and Travel Retail.”

ii round-up:

Premium spirits maker Diageo (LSE:DGE) reported higher first half sales and profits but lowered its full-year sales expectations. 

Ongoing uncertainty in the global trade environment underlay the sales downgrade. EU subsidies given to plane maker Airbus (EURONEXT:AIR) provided reason for the US to slap 25% tariffs on imports of scotch back in October. 

Diageo products are sold in more than 180 countries. Group brands include Johnnie Walker scotch, Smirnoff vodka, Captain Morgan rum, Baileys Irish Cream, and Guinness stout.

A debate over proposed digital taxes on US tech company sales also continues, with the US again threatening to retaliate.

However, for the year to date, North American sales exceeded analyst estimates, partly offsetting softer and below forecast Asian and Latin American demand. 

Productivity benefits from cost efficiencies helped to drive operating profit, while the company returned £1.1 billion to shareholders via share buybacks under its plan to give back up to £4.5 billion of capital to shareholders for the period 2020 to 2022. 

The share price drifted just over 2% lower in afternoon UK trading. 

ii view:

The company’s stable of diverse and well-known brands has helped Diageo catch the eye of many investors. A track record of 14 consecutive years of increasing the value of its modest dividend payments also works in its favour. A management focus on product innovation and productivity initiatives add to the investment case, complimented by emerging market demand for scotch and its exposure to China and India. 

For investors, a prospective dividend yield of just over 2% (not guaranteed) is not to be dismissed in the current low-interest rate era, while the company is regarded as relatively defensive. But a forward price/earnings (PE) ratio at over 20 and marginally above the 10-year average does not signal obvious value. For now, with global trade tensions elevated, the shares may well be up with events. 

Positives: 

• Stable of diverse and well-known drink brands
• A focus on shareholder returns

Negatives:

• The US – its biggest market – has imposed tariffs on scotch
• Currency movements can hinder performance

The average rating of stock market analysts:

Strong hold