Diageo (LSE: DGE) (NYSE: DEO.US), the FTSE 100 drinks giant, is due to announce its interim results on Thursday next week (30 January).
At the time of writing, Diageo’s shares are trading at 1,990p — down 2% from six months ago compared with a 3% rise for the Footsie. Growth has slowed in many emerging economies of late, hitting the shares of Diageo and other companies with high exposure to these markets, such as Unilever, British American Tobacco and SABMiller.
In a first-quarter update released in October, Diageo mentioned sales declines in China and Russia, and weaker trading in Nigeria and Ghana. Nevertheless, chief executive Ivan Menezes said: “We remain committed to delivery of our medium term guidance”.
The company had set out medium-term targets for the business in its annual results for the year ended 30 June 2011. The table below shows the guidance and the achievement to date.
| Guidance | Achievement 2011/12 |
Achievement 2012/13 |
|
|---|---|---|---|
| Organic net sales growth | Average 6% | 6% | 5% |
| Organic operating margin improvement (basis points) |
200 bps by 2013/14 |
60 bps | 80 bps |
| Earnings per share (EPS) growth | Double digits | 13% | 11% |
In this year’s first-quarter update, Diageo reported organic net sales growth of 3.1%. In the upcoming half-year results, shareholders should be looking to see if there’s been any improvement in Q2. In particular, keep an eye on the Africa, Eastern Europe and Turkey segment, where growth was just 1.3% in Q1, and Asia Pacific, where growth was even more anaemic at 0.6%.
Diageo has been improving its operating margin, and needs a further 60 bps increase this year to meet its target of 200 bps by 2013/14. Watch this number at the halfway stage to see if the company’s on track to get there.
As a result of changes to accounting regulations, most companies reporting this year will be restating last year’s comparative numbers. My calculations suggest last year’s first-half EPS number (pre-exceptional items) of 60.9p will be restated as 60.2p. If so, we’d need to see 66.2p this first half for double-digit growth. But that looks a tall order, given the first-quarter sales performance and analyst forecasts of mid to high single-digit EPS growth for the full year — below the company’s double-digits target.
I reckon the interim dividend should be as good a guide as anything to management’s confidence for the remainder of the year. The board increased the 2011/12 dividend by 8% and the 2012/13 payout by 9%. Last year’s interim was 18.1p, so if management’s confidence continues to be high, we should be looking for a payout in the 19.5p-19-7p area.
