Should I buy Diageo shares now that it’s returning capital to shareholders?

Diageo shares have been rising. But I think the company’s latest announcement is interesting. Here’s my take on it.

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I selected  Diageo (LSE: DGE) shares as my top pick for May. And I’m pleased to say that a company announcement yesterday was very encouraging. I’ll cover this statement in detail shortly.

But it’s worth noting that the stock has been rising recently. The hospitality sector has now reopened so I’d expect the firm’s sales to recover. I think Diageo shares could rise further and I’d buy the stock in my portfolio.

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Trading update

The beverage company released a brief trading update this week, which was positive. It highlighted that “it expects organic operating profit growth to be at least 14% in fiscal 21, slightly ahead of organic net sales growth”.

Diageo has so far seen good sales recovery across all regions. In particular, North America, the largest market, where “performance has remained particularly strong”. It also went on to mention that despite the impact of Covid-19, it’s seeing a “continued recovery” in Africa, Asia Pacific, Latin America and the Caribbean.

While the pandemic is not over yet, I think this is encouraging news. So far, things seem to be heading in the right direction. As the hospitality sector starts to reopen in different economies, more people are likely to drink alcohol and this should push Diageo shares higher.

Return of its capital programme

I think the key item from the announcement was that the company has decided to restart its return of capital programme (ROC).

On 25 July 2019, the board agreed to return up to £4.5bn to shareholders in the three-year period from July 2019 to June 2022. This was going to be done through either share buybacks or special dividends, depending on market conditions.

Diageo had repurchased £1.25bn of its shares by the end of January 2020. This was the first phase of the ROC. But that was before the pandemic. Unfortunately the world was struck by the coronavirus crisis and the company had to go into survival mode.

I think it’s fantastic news that the FTSE 100 firm has decided to initiate the second phase of ROC of up to £1bn, which will be completed by the end of the 2022 fiscal year. Diageo has entered into an agreement with UBS to enable it to start share buybacks from 12 May 2021 up to the value of £0.5bn. This is expected to end by 12 November 2021.

The company has also stated that “further execution phases of the ROC programme will be announced in due course”. I think this news sounds promising for Diageo shares.

The fact that the firm can do this now means that it has robust cash generation. It also highlights that the board is shareholder-friendly. This is a quality I look out for when analysing a company.

Risks

Things may look rosy, but any Covid-19 setbacks may hinder Diageo shares. Further lockdowns could mean the hospitality sector shuts down again. If this happens, it’s likely to have an impact on the company’s revenue and profitability.

And there is no guarantee when it comes to ROC. Even though the board has decided to restart this, if market conditions deteriorate it could be halted.

But I’m optimistic on the outlook for Diageo shares so I’d buy the stock. I think the worst is behind the company and a strong sales recovery is in sight.

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Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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