Stocks in Focus: Diageo

Girish Ramrous, NW Brown

This week Girish Ramrous of NW Brown looks at Diageo plc, one of the world’s largest beverage groups. The business, which is known for its stable of recognisable brands such as Johnny Walker, Guinness and Smirnoff, has recently announced its interim results for the period ending 31 December 2017.

Overall, the results were encouraging. The company’s year-on-year increase in sales was above analysts’ growth expectations, pre-tax profits rose by 6% and earnings per share grew 9.4% compared to the previous year. Management has raised the interim dividend by 5% and stated that they expect further margin growth and improvements in net sales over the next 18 months. They also highlighted that the recent strengthening of the pound against the dollar would hit full-year sales and operating profits as the US is Diageo’s largest market and contributes nearly 45% of its profits. However, management also added that the Trump administration’s recent tax cuts would offset some of the negative currency impact.

CEO Ivan Menezes launched a cost-saving programme a couple of years ago and the recent interim results show that the project has been diligently executed. The underlying business is delivering well against expectations and is on track to meet its 2019 target to become more efficient, leaner, and more agile. Looking at Diageo’s market segments, a growing middle class in emerging markets is playing into the group's hands too. As consumers move up the value chain, the advantage of Diageo's big portfolio of brands is that it can provide premium labels to meet every taste. Furthermore, cash flow remains robust and the recent dividend increase continues an enviable record of dividend growth that stretches back to the 1990s. 

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