ii view: Diageo – more than just a bump in the road?

AGM/Early year trading update

• Continues to expect the challenging sales conditions and negative profit margin pressure seen in the second half of 2024 to persist into the full year 2025
• Continues to expect medium-term organic sales growth of between 5% to 7% with margin expansion longer-term

ii round-up:

Diageo (LSE:DGE) is the world's largest premium spirits company with an estimated 30% share of the global premium spirits market. 

Scotch provides its biggest seller at around 24% of sales, followed by beer or Guinness at 16%, Tequila at 11% and Vodka at 9%. 

For a round-up of this latest trading update on 26 September, please click here.

ii view:

Diageo was formed back in 1997 when Grand Metropolitan and Guinness agreed a merger. Today it sells over 200 brands including Johnnie Walker whiskey, Smirnoff vodka, Captain Morgan rum and Baileys cream liqueur in around 180 countries. The FTSE 100 company employs around 30,000 people across just over 130 production sites. 

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Geographically, North America accounts for its biggest slug of sales at 39%, followed by Europe at 24%, Asia Pacific at 19% and both Latin America and the Caribbean and Africa at 9% each. Diageo also owns a 34% stake in Moët Hennessy and 55% of United Spirits in India.

For investors, the tough economic conditions impacting its Latin American and Caribbean business cannot be ignored, with sales in North America also in retreat. Consumer spending globally remains pressured by elevated costs including those related to borrowing. Group net debt in the 2024 financial year grew, while ethical concerns regarding alcohol consumption may also deter some investors.  

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To the upside, market share for more than three-quarters of its markets including in the US continues to be won. Operational efficiencies following on from the $700 million savings made in fiscal 2024 are still being pursued. A diversity of product brands and geographical regions also now includes alcohol-free alternatives, while dividend payments have risen for more than 15 consecutive years, leaving its shares sat on a forecast dividend yield above 3%.   

Expert opinion on Diageo is split. Challenges including the likely switching by consumers to cheaper alternatives certainly offer room for caution, and the shares don't look especially cheap versus the 10-year average price/earnings ratio. But this is a well-run company that thrives during  a consumer boom, and management confidence is hard to ignore.

Positives: 

• Stable of diverse and well-known drink brands
• Enviable dividend growth track record

Negatives:

• Uncertain economic outlook
• Exposure to currency risk

The average rating of stock market analysts:

Hold