ii view: diversified Diageo bullish on growth prospects

More than 200 drink brands and an enviable dividend growth track record. Buy, sell, or hold?

First-half results to 31 December

• Net sales up 9.4% to £9.42 billion
• Operating profit up 15.2% to £3.2 billion
• Interim dividend up 5% to 30.83p per share
• Expects to return £0.8 billion via a share buyback programme

Chief executive Ivan Menezes said:

"We have made a strong start to fiscal 2023. In a challenging cost environment, our organic operating margin increased 9 basis points whilst we also continued to invest for the future. Today, Diageo is 36% larger than it was prior to Covid-19, reflecting the strength of our diversified footprint and advantaged portfolio. 

"As we look to the second half of fiscal 2023, whilst the operating environment remains challenging, I remain confident in the resilience of our business and our ability to navigate volatility. We believe we are well-positioned to deliver our medium-term guidance of consistent organic net sales growth in the range of 5% to 7% and sustainable organic operating profit growth in the range of 6% to 9% for fiscal 2023 to fiscal 2025."

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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. 

Around four-fifths of its sales come from spirits, with just under a fifth from beer including Guinness, and a small balance from a wine and spirits merchants. 

For a round-up of these latest results announced on 26 January, please click here.

ii view:

Diageo was established in 1997 when Grand Metropolitan and Guinness agreed a merger. Today it sells over 200 brands in more than 180 countries. Those brands include Johnnie Walker whiskey, Smirnoff vodka, Captain Morgan’s rum, Gordon’s gin, Don Julio tequila and Baileys liqueur. The US generates its biggest slug of sales. The FTSE 100 company also owns a 34% stake in Moët Hennessy and 55% of United Spirits in India. 

For investors, management caution regarding the outlook for its key US market cannot be ignored. A potential tailwind from the pandemic as consumers enjoyed its products from home may be fading, costs such as those used for energy in making glass bottles remain elevated, while the uncertain economic outlook persists given high inflation and rising interest rates. 

On the upside, its strength and diversity of brands has allowed it to hold or gain market share in around three-quarters of its overall markets in this latest period. Rising costs are being offset by product price increases, aided by the broader consumer trend towards premium brands, while shareholder returns remain a management focus, with dividend payments rising for more than 15 consecutive years and a share buyback programme ongoing.  

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On balance and given an enviable record of steady growth, Diageo looks to remain worthy of a place in a diversified long-term focused portfolio.  

Positives: 

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

Negatives:

• Uncertain economic outlook
• Exposure to currency risk

The average rating of stock market analysts:

Strong hold