The Diageo (LSE: DGE) share price is doing an unusual thing today. It’s actually rising. Yes, shares in the FTSE 100 spirits maker are finally pointing the right way.
That hasn’t happened much lately. The stock is still down 25% over 12 months and more than 50% over three years. That’s a dreadful run for what used to be one of the UK’s most solid and reliable blue-chips.
Diageo has been on the ropes for a while, battered by a string of profit warnings, cost pressures, shifting drinking habits and worries about the impact of weight loss drugs. Even the Guinness craze couldn’t stop the slide. But now we’ve had some long-awaited good news.
Sales growth holds firm
Today (5 August), Diageo released its full-year results and the shares jumped 6% in early trading. That’s a much-needed morale boost, especially for me as a long-term shareholder. I’m still sitting on a 30% paper loss though.
Reported operating profit slumped 27.8% to $4.33bn, hit by impairments and currency shifts. Yet stripping those out, underlying profits dipped just 0.7% to $5.7bn. That’s not exactly a barnstorming result, but it could have been worse.
Reported net sales fell 0.1% to $20.2bn. Organic net sales growth came in at 1.7% with both volume and price contributing. The group said it held or gained market share across 65% of measured markets, including the US, which has been a problem area lately.
Free cash flow hit an impressive $2.7bn. Diageo held its full-year dividend steady at 103.48 cents. I’d have liked to see an increase. The trailing dividend yield is 4.16%.
Management also raised the target for its cost-cutting programme from $500m to $625m over the next three years. It knows the business needs to change.
Cost savings lifeline
Hargreaves Lansdown equity analyst Aarin Chiekrie said Diageo just about beat analysts’ cautious expectations, helped by some customers stocking up ahead of looming tariffs. He praised Guinness for another year of double-digit revenue growth and said the group’s brand stable remained world class.
Tariffs could add around $200m of extra annual costs, so Diageo is rightly getting on with trimming spending elsewhere. It still carries $21.9bn of net debt and may need to sell some smaller brands to shrink that. Chiekrie thinks any disposals would focus on slower-growth, lower-margin assets.
The recent exit of CEO Debra Crew shows the pressure is on. A permanent replacement has yet to be named, but whoever steps in will have a tough task to steady the ship.
FTSE 100 recovery play?
There’s still a long way to go. Younger drinkers may never embrace alcohol like older generations did. The impact of weight loss drugs on booze consumption is also unclear. And as I’ve learned the hard way, even the best brands can underperform if management misreads the market.
Yet after such a dire run, Diageo is edging in the right direction. The shares now trade at a price-to-earnings ratio of a lowly 13.93, down from around 24 or 25 in better days. That looks fair value for a global brand owner with decent free cash flow.
This could be a long haul. We need a brighter set of results before Diageo gets its old fizz back and is worth considering. Patience required.
