Why Diageo shares keep falling and BT bounces

The cheapest Diageo (LSE:DGE) shares in over a decade and fresh impetus for BT Group (LSE:BT.A) today marked contrasting results-day fortunes for two of the staples of the FTSE 100 index.

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Weaker demand for China’s national drink contributed to the latest woe for Diageo shareholders, whereas BT benefited from City relief at unchanged guidance.

BT shares rallied by as much 5% early in the session to near 190p, marking a return to form following a fall of a fifth since setting a six-year high of 222p in July.

Positives from half-year results included a flat second-quarter underlying earnings figure of £2.1 billion, which was slightly better than consensus forecasts for a small decline.

Cost controls boosted the outcome as BT offset a 3% decline in revenues and the impact of higher National Insurance contributions and rise in National Living Wage.

Key performance indicators showed growth in consumer mobile and broadband net additions, while line losses at the Openreach regulated arm were no worse than City expectations.

Morgan Stanley, which has a price target of 260p, said the KPIs offered encouragement heading into BT’s seasonally stronger second half of the financial year.

The relief rally for shares came as chief executive Allison Kirkby reiterated guidance for the year to March and backed a cash flow target of £3 billion by the end of the decade.

This is double the £1.5 billion expected in 2025/26 as BT’s full-fibre network build is due to be complete by December 2026, increasing the scope for higher dividends.

The interim dividend for payment on 11 February has been increased by 2% to 2.45p a share, in line with BT’s policy of paying 30% of the prior year's full year award.

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UBS, which has a Sell recommendation, said its cautious view on BT is unchanged despite today’s slight earnings beat.

It believes Openreach will have to cut pricing to stem line losses as internet providers Sky and Vodafone shift more volumes to alternative network providers.

BT continues to forecast 900,000 Openreach annual line losses amid the impact of alt-nets and a weaker overall broadband and new homes market.

China blamed for Diageo drop

The latest deterioration of Diageo shares reflects weaker demand for baijiu, which as China’s national drink is one of the most consumed alcoholic beverages in the world.

In contrast, Diageo reported good growth in scotch, notably Johnnie Walker, and in beer with Guinness. Net sales were flat in the first quarter of the financial year, with solid performances in Europe, Latin America and Africa offset by weakness in China and US spirits markets.

Interim chief executive Nik Jhangiani said: “We are not satisfied with our current performance and are focused on what we can manage and control.” He pledged that Diageo would act with speed to drive efficiencies and adapt more quickly to an evolving consumer environment.

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Jhangiani now expects net sales for the year to June to be flat or slightly lower, a downgrade that moved Diageo in line with existing City forecasts. However, UBS said the revision of operating profit growth to the range of low to mid-single digits was not expected.

It added: “We think prolonged weaker industry trends will drive the board/management to realise value through other means.”

From April 2022’s 4,000p, the shares are trading below 1,700p for the first time in over a decade.

Analysts at Jefferies have a price target of 2,400p, noting that a valuation of 13.9 times forecast 2026 compares with the wider staples sector on about 16.8 times.

Graeme Evans owns Diageo shares