One Reason Why I Would Buy Diageo plc Today

Today I am looking at why I consider Diageo (LSE: DGE) (NYSE: DEO.US) to be a shrewd growth selection

Mammoth cost-cutting to boost earnings growth

With sales in developing markets pressuring the firm’s revenues outlook, Diageo is having to box clever in order to keep earnings Diageoticking higher. Indeed, the firm is currently undertaking a significant expense-slashing initiative in order to boost margins and facilitate future investment, and  plans to cut £200m from the costs column by mid-2017.

And reports emerged in recent days that Diageo is ratcheting up its cost-cutting plan across the globe, with The Daily Telegraph stating that the firm has taken the hatchet to 200 headquarter and high-level regional posts in order to respond to local market changes more effectively.

Following the story Diageo commented that it has “put in place a structure whereby resource and decision-making is deployed at a local level wherever possible, closer to customers and consumers and enhancing our responsiveness and agility.” The business added that “savings… will be put back into the growth of our brands and markets, as well as fund future efficiency programmes.”

Diageo has seen sales slow considerably in recent months. While it reported organic net sales expansion of just 0.3% during June-March, revenues fell 1.3% during the final three months of this period, mainly on the back of weakness in Asia Pacific where demand nosedived 19%.

However, the company is betting big on a massive resurgence in these areas, and pumped $1.9bn into India’s United Spirits in April to purchase a further 26% worth of shares in the Asian spirits giant. It now holds a controlling near-55% stake in one of the lucrative country’s biggest spirits producers.

While fears over falling sales in developing regions should be a concern, of course, I believe that the firm’s extensive cost-reduction exercise should help to keep earnings on an upward keel, boost its already-considerable cash pile and lead to further M&A action in the near future.

And with its key Western markets also showing signs of solid improvement, and current turbulence in emerging regions likely to subside as spending power marches steadily higher, in my opinion Diageo is an excellent contender for long-term earnings growth.

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> Royston does not own shares in Diageo.