ii view: drinks maker Diageo slumps again

Full-year results to 30 June

• Adjusted or organic sales fell 0.6%
• Earnings per share down 12% to 173.2 US cents
• Final dividend of 62.98 US cents
• Total full-year dividend up 5% to 103.48 US cents
• Net debt up 7% to $21 billion

Chief executive Debra Crew said:

“While fiscal 24 was a challenging year for both our industry and Diageo with continued macroeconomic and geopolitical volatility, we focused on taking the actions needed to ensure Diageo is well-positioned for growth as the consumer environment improves.”

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ii round-up:

Alcoholic drinks maker Diageo (LSE:DGE) today reported sales and profit which missed City forecasts, mainly due to reduced consumer demand across both Latin America and the Caribbean, as well as North America.

Annual adjusted, or organic sales stripped of acquisitions fell 0.6%, taking adjusted profit down 4.8%. Analysts had been expecting declines of 0.2% and 4.5% respectively. Organic sales in Latin America and the Caribbean fell 21.1% as consumers switched to cheaper brands of tequila and scotch. North America organic sales dropped 2.5%, hindered by consumer caution and retailer inventory adjustments, and less than the 1.5% retreat seen in the first half.

Shares in the FTSE 100 company fell as much as 10% in UK trading, taking the price to a new post-Covid low. They'd come into these latest results down by just over a tenth year-to-date, similar to fellow alcoholic beverages maker Heineken NV (EURONEXT:HEIA). The FTSE 100 index is up 6% in 2024. 

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

Elsewhere, organic sales improved 12.2% in Africa, 4.4% across Asia Pacific and 2.8% in Europe. Diageo highlighted it is retaining or growing total market share in more than three-quarters of its markets including the US.  

Of the 4.8%, or $304 million decline in organic operating profit year-over-year, $302 million was attributable to Latin America and the Caribbean. Group wide earnings per share, and including a reduced contribution from Moet Hennessy and higher finance costs, fell 12% year-over-year to 173.2 US cents.

A final dividend of 62.98 US cents takes the total payment for the year up 5% to 103.48 US cents per share. 

Diageo offered no forecasts for the year ahead, but continues to expect challenging sales and profit margin pressure to persist. A forecast for sales growth over the medium term of between 5% and 7% remains in place.

A trading update may accompany its Annual General Meeting, likely in late September or early October. 

ii view:

Diageo was formed in 1997 when Grand Metropolitan and Guinness agreed a merger. Today it sells over 200 brands including Johnnie Walker whiskey, Smirnoff vodka, and Baileys cream liqueur in around 180 countries. 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. The FTSE 100 company also owns a 34% stake in Moët Hennessy and 55% of United Spirits in India.

For investors, the challenging economic headwinds impacting its Latin American and Caribbean business cannot be ignored. Consumer spending globally remains pressured by elevated costs including borrowing costs. Group net debt has risen, while ethical concerns regarding alcohol consumption may deter some investors.  

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More favourably, a diverse rage of brands and geographical regions helps balance out specific challenges. Record productivity savings of nearly $700 million have been achieved over this latest financial year, a drive to generate a more digital Diageo continues, while shareholder returns remain a focus, with the dividend payment rising for more than 15 consecutive years, leaving its shares on a forecast dividend yield of over 3%.

Diageo shares are a difficult call. They've fallen in value by 45% since the start of 2022 and trade at levels seen only once during the past seven years, at the beginning of the pandemic. It has enviable market share in an industry that has, historically, done well, but much now depends on its ability to better offset the impact of weak consumer demand for expensive drinks. That said, with Diageo well placed for when the global economy does improve, long-term investors might be tempted to sit tight and gamble on a recovery. But when that might be is unclear.

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