Interactive Investor

ii view: Diageo keeps dividend, but delivers mixed news

9th April 2020 14:53

Keith Bowman from interactive investor

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Covid-19 sees sales and profit forecasts withdrawn but the dividend is still being paid. 

Covid-19 trading update

  • Withdrawing full-year financial guidance
  • Suspending share buy-back programme
  • Paying previously announced interim dividend

Chief executive Ivan Menezes said:

"During this challenging time, our top priority is to safeguard the health and well-being of our people, while taking necessary action to protect our business. I am confident in Diageo's long-term strategy and our ability to move quickly in this difficult environment. We will continue to execute with discipline and invest prudently to ensure we are strongly positioned for a recovery in consumer demand. I am proud of the resilience and commitment of our people as they work hard to support our partners, customers and communities."

ii round-up:

Premium spirits maker Diageo (LSE:DGE) today withdrew sales and profit estimates for 2020 and suspended its £4.5 billion share buy-back programme as it battled the uncertainty caused by Covid-19.

While some slow return to trading had been seen in China, as bars and restaurants reopened, trade in the US, its biggest market, had suffered as most States closed restaurants and bars. 

Similar closures had hit European on-trade or hospitality outlets, although sales for off-trade or retail operations such as supermarkets in both Europe and the US had ticked up. 

Diageo shares rose by more than 2% in afternoon UK trading as the beverages group decided to pay its previously announced half-year dividend payment. 

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

Year-to-date its shares are down by around 20%, similar to beverage rivals Britvic (LSE:BVIC) and Coca-Cola HBC (LSE:CCH)

£1.25 billion of its £4.5 billion share buy-back programme to 30 June 2022 had already been used, with the scheme now suspended for the rest of 2020. 

In 2019 Diageo found itself embroiled in the trade war between the US and the EU. Subsidies given to plane maker Airbus (EURONEXT:AIR) provided reason for the US to slap 25% tariffs on imports of Scotch. 

ii view:

The company’s stable of diverse and well-known brands has helped Diageo catch the eye of many investors. 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 focus on shareholder returns sits high on the attraction list. A track record of 14 consecutive years of increasing the value of its dividend payments is enviable. Although in a Covid-19 world, and with share buy-backs already suspended, this is clearly not guaranteed. In all, with the uncertainty of both Covid-19 and still lingering global trade tensions, there appears to be no urgent need to act.     

Positives: 

  • Stable of diverse and well-known drink brands
  • Interim dividend being paid

Negatives:

  • Bar & restaurant trade significantly hit
  • Lingering trade tensions with scotch targeted for tariffs

The average rating of stock market analysts:

Strong hold

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.

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