ii view: new Diageo strategy involves massive dividend cut

First-half results to 31 December

• Net sales down 4% to $10.46 billion (£7.74 billion)
• Operating profit before exceptional items down 2.8% to $3.25 billion 
• Interim dividend of 20 US cents, down from 40.5 cents a year ago
• Net debt of $21.7 billion

Guidance:

• Now expects full year sales to fall by between 2% and 3%, down from a previous estimate of flat to slightly down
• Now expects profit to be flat to up by a low-single-digit percentage, adjusted from a previous estimate for a low-single-digit gain
• Expects the annual dividend to be no lower than 50 US cents per share compared with last year’s 103 cents  

Chief executive Sir Dave Lewis said:

“Our performance in the first half of fiscal 26 was mixed. Only several weeks in I can already see significant opportunities for Diageo to act more decisively to enhance its competitiveness and broaden the portfolio offering leading to higher growth.”

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ii round-up:

Drinks giant Diageo (LSE:DGE) today halved its interim dividend payment as part of plans by new head Sir Dave Lewis to reignite growth. He also downgraded sales and profit forecasts for 2026. 

An interim dividend of 20 US cents, to be paid to eligible shareholders on 4 June, is down from last year’s 40.5 cents per share. In a further shake-up, the company reduced its payout policy to 30-50% and committed to a minimum annual dividend of 50 US cents per share in 2026. Last year, the policy was about 63% and the annual payout was 103 cents. The rebase is being made in order to increase financial flexibility and help reduce group net debt of $21.7 billion as of late December. 

A 4% fall in half-year sales to $10.46 billion now sees management reduce full-year adjusted sales estimates to a fall of between 2% and 3%, down from a previous estimate of flat to slightly lower. Full-year profit is now expected to be flat to up by a low single-digit percentage compared to a previous estimate for a low single-digit gain. 

Shares in the FTSE 100 company fell 7% in UK trading having come into these latest results up by close to a fifth so far in 2026. That’s similar to fellow drinks maker Pernod Ricard SA (EURONEXT:RI). The FTSE 100 index is up 8% year-to-date. 

Diageo drink brands include Johnnie Walker whiskey, Smirnoff vodka, Captain Morgan rum, Don Julio tequila, Bailey’s cream liqueur and Guinness stout.

Adjusted, or organic net sales down 2.8% for the half year were driven by a 0.9% drop in volumes and a negative price/mix of 1.9%.  

Operating profit before exceptional items for the period fell 2.8% to $3.25 billion. Earnings on the same basis declined 2.5% from a year ago to 95.3 US cents per share. 

A third-quarter trading update is scheduled for 6 May. 

ii view:

Formed via a merger of Grand Metropolitan and Guinness back in 1997, Diageo today sells more than 200 drink brands in almost 180 countries. The group has an estimated 30% share of the global premium spirits market. Spirits generated most sales during this latest half year at 76%, followed by beer at 17%, and pre-mixed or ready-to-drink products the balance of 4%. Geographically, North America accounts for most sales at 36%. That’s followed by Europe at 26%, Asia Pacific at 18%, Latin America and the Caribbean at 11%, and Africa the balance of 8%. 

For investors, stretched consumer spending globally is likely pushing customers to downgrade to cheaper supermarket-own brands. Changing drinking habits and consumer moderation are also having an influence. A targeted dividend payout ratio of 30-50% of earnings is down from last year’s 63%, while US trade tariffs and alcohol restrictions in China remain headwinds.

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More favourably, the tenure of new head and recovery specialist Dave Lewis has only just begun. Low and zero alcohol trends are seen by management as offering opportunity given its existing strong brand names. A drive to increase efficiency and cost savings has already gained momentum under previous management, while the early and difficult decision to rebase the dividend generates increased financial flexibility and potential opportunity for more investment. 

On balance, Diageo remains a work in progress. However, a reinvigorated strategy and consensus analyst fair value estimate above £20 per share may appeal to speculative investors or those with a longer-term view.  

Positives: 

• Stable of diverse and well-known drink brands
• Non-alcoholic organic sales up 14%

Negatives:

• Uncertain economic outlook
• Exposure to currency risk

The average rating of stock market analysts:

Buy