ii view: Diageo's latest comms goes down well

Covid disruption remains, but bars have reopened and a yield of over 2% is not to be dismissed.  

AGM first-quarter trading update

ii round-up:

Premium spirits and Guinness maker Diageo (LSE:DGE) reports improving trends across all its geographical regions as bars and clubs had reopened following coronavirus lockdowns.

Its biggest market, the US, where bars and clubs or on-trade generates around a fifth of sales, proved a particularly strong performer.

Diageo shares rose by more than 5% in UK trading having fallen by around a fifth year-to-date. Shares for bottler and distributor Coca-Cola HBC (LSE:CCH) are down by a similar amount while shares of soft drinks maker Britvic (LSE:BVIC) are down by around a tenth in 2020. 

Strength in US trading underpinned an improved outlook for the current 2021 first-half compared to Diageo’s expectations back in August when it announced virus-hit full-year 2020 results.   

Both organic net sales and operating profit are expected to improve compared to the second half of fiscal year 2020 which ended in late June. But compared to the first half of the financial year, management still expects lower organic net sales and margin dilution given ongoing pandemic disruption. The first half of the financial year typically accounts for around 60% of Diageo’s annual profits.

Trading in both Europe and China was also encouraging, although the pace of recovery in India, Africa and Latin America will be more gradual.

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

Operating profit for 2020 almost halved to £2.1 billion when including a non-cash impairment of £1.3 billion to reflect the impact of Covid-19 in India, Nigeria and elsewhere. 

ii view:

Diageo was formed  in 1997 when Grand Metropolitan and Guinness agreed a merger. A producer of branded premium spirits, it also produces and markets beer and wine. Since the onset of Covid-19, it has been managing costs, reducing discretionary expenditure, and reallocating resources across the company. It has also enhanced its data analytics and technology tools in order to respond to local consumer and customer shifts triggered by the pandemic.

For investors, the pandemic outlook and potential for governments to retighten restrictions like early bar closing times, as in the UK, cannot be overlooked. A previous halting of its £4.5 billion share buy-back programme also highlights the need for required financial prudence in uncertain times. 

But a record of over 10 consecutive years of dividend payment increases underlines management’s focus on shareholder returns, including a 2% increase to 69.88p per share for its last Covid hit 2020 financial year. For now, and with the shares offering a historic and estimated forward income yield of over 2% - not unattractive in an era of ultra-low interest rates – Diageo continues to justify investor support.  

Positives: 

• Stable of diverse and well-known drink brands
• Attractive dividend (not guaranteed) 

Negatives:

• Uncertain Covid outlook
• Suspended share buy-back programme

The average rating of stock market analysts:

Strong hold