Eyes Down For Diageo plc Results

DiageoDrinks giant Diageo (LSE: DGE) (NYSE: DEO.US) has reported three consecutive years of double-digit rises in earnings per share (EPS), together with a steadily rising dividend.

On Thursday 31 July, we’ll have the figures for the year ended June 2014, so will we be seeing the same again? The short answer is no — at least no rising earnings, but the dividend should head further up.

Earnings set to drop

In fact, there’s a 5% fall in EPS currently forecast by the City’s experts, and it will be down to a couple of major causes. One of those is a strongly-rising pound, which will adversely affect a number of other big companies reporting in sterling.

Still, at least the dividend looks set to be lifted by about 7.5%, but with the shares changing hands at 1,821p, the yield will only be around 2.8%.

In the first half, the owner of the Johnnie Walker and Smirnoff brands (amongst many other big names) was hit by weakening sales in China — partly through a clampdown on expensive gift-giving in an attempt to stem corruption. Some other emerging markets slowed a little, too, and around 40% of Diageo’s sales come from emerging markets.

Global balance

But that was to some extent balanced by US sales, with chief executive Ivan Menezes saying that “Sustained performance in the US and improved performance in Western Europe enabled Diageo to absorb the current challenges in some of our emerging markets“. The net result was a 3% fall in organic sales.

Diageo told us it expected the second half to be better, and by the time of the company’s third quarter we heard of an overall 0.3% rise in organic sales. But sales in China continued downwards, with the Asia Pacific region recording a 19% drop — it was the Latin America and Caribbean segment that saved the day, with a 28% rise.

The Diageo price has slipped by 11% over the past 12 months, so are the shares a good buy now?

Looking toppy

Well, forecasts still put the shares on a P/E of more than 18, even after the fall, and that’s as high as it’s been for a good few years — and a forecast return to EPS growth of 6% for 2015 would still leave the P/E a little over 17. Diageo is committed to sustainable dividends, mind, even if the yield is not great, and investors are clearly prepared to pay high prices for that.

But unless there’s a pleasant surprise in the upcoming results, I see the shares as a bit too expensive right now.

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Alan Oscroft has no position in any shares mentioned.