ii view: Diageo remains a popular tipple

Net sales momentum across all regions and a forecast dividend yield of around 2%. Buy, sell, or hold?

AGM first-quarter trading update

ii round-up:

In a short trading statement, premium spirits and Guinness maker Diageo (LSE:DGE) pointed to a strong start to its new 2022 financial year, with organic net sales momentum seen across all regions.

Resilient store, or off-trade sales remained, while a recovery in its bar, or on-trade sales from the pandemic continued to unfold.  

Shares for the maker of brands including Johnnie Walker scotch and Smirnoff vodka rose by more than 1% in UK trading. That leaves them up by close to 65% from pandemic induced market lows back in March 2020. 

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Shares for Magners and Tennent’s maker C&C Group (LSE:CCR) are up by a similar amount, while soft drinks firm Britvic (LSE:BVIC) has risen by closer to 50%. 

North America, including its biggest profit generator the US, performed strongly, despite some supply chain constraints. Difficulties meeting strong tequila and Crown Royal demand have already been flagged.

Its business in Europe is recovering ahead of management’s expectations, while Africa, Asia Pacific and Latin America performed well, although volatility across these markets is likely to persist. Travel related sales had remained disrupted given the ongoing hinderance from the pandemic.

The maker of products sold in more than 180 countries continues to invest in its marketing and commercial capabilities. 

A further recovery in sales volumes is expected to aid its organic operating profit margin, while rising inflationary pressures from supply chain constraints continue to be managed. 

Broker Morgan Stanley edged higher its 2022 forecasts and raised its target price to £41 from £40. 

ii view:

Diageo was formed back in 1997 when Grand Metropolitan and Guinness agreed a merger. It 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 sprits, with just under a fifth from beer, including Guinness and a small balance from the ready-to-drink market. It also owns a 34% stake in Moët Hennessy and 55% of United Spirits in India. 

For investors, ongoing management caution regarding the pandemic should not be ignored. A price-to-net asset value above the three-year average also suggests the shares are not obviously cheap, while alcohol remains a potential target for financially Covid stretched governments to raise duty taxes on going forward.   

But this latest update broadly reassures, with net sales momentum enjoyed across all regions. Its exposure to tequila has been raised to 8% of sales from 1% in 2015, while a record of more than 15 years of consecutive rises in the dividend is not to be forgotten. In all, and with the shares sat on a not derisory 2% estimated future dividend yield in an era of ultra-low rates, it remains worthy of place in many investors long-term portfolios.  

Positives: 

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

Negatives:

• Uncertain Covid outlook
• Exposure to currency risk

The average rating of stock market analysts:

Buy