Alcoholic drinks giant Diageo (DGE) has served up record full year profits, upped the dividend (again) and launched a palate-pleasing £1.5bn share buy-back.
On top of these delights, the Johnnie Walker whisky, Captain Morgan rum and Tanqueray gin brands owner raises its three-year margin improvement target, news that sees the shares trade 6.2% (140.5p) higher at £24.13 early on.
THIRST-QUENCHING PERFORMANCE
The world’s biggest spirits business, whose other brands include Smirnoff, Guinness and Baileys, is one of Shares’ running Great Ideas selections.
Understandably, we’re pleased by the well-received numbers for the year ended 30 June, which leave our ‘buy’ call from January 11% in the money.
Diageo’s sales and operating profits frothed up 15% to £12.1bn and 25% to £3.6bn respectively last year. This performance reflected helpful currency movements but more importantly, an acceleration in Diageo’s organic growth. Second half organic growth of 4.2% came in ahead of consensus estimates.
RAISING MARGIN TARGETS
CEO Ivan Menezes says his charge has ‘delivered consistent strong performance improvement across all regions’ and is pleased with ‘progress in our focus areas of US Spirits, scotch and India’.
Menezes adds: ‘Diageo is a strong company today and we are confident in our ability to deliver sustainable growth. We are raising our productivity goal to £700m with two thirds being reinvested in the business. We continue to expect mid-single digit top line growth, and we are raising our operating margin expansion objective to 175bps over the three years ending 30 June 2019.’
AN EXPENSIVE DEFENSIVE
Diageo is a high-quality ‘expensive defensive’ worth owning given wider macro-economic uncertainties, although the valuation is fairly demanding with the shares trading on 22 times broker Liberum’s 110.9p June 2018 earnings forecast.
Strong brands represent an economic moat, engendering loyalty among consumers, conferring pricing power upon Diageo and creating barriers to entry for rivals.
Earnings are geographically diversified and free cash flow generation remains strong, supporting investment behind its brands and in acquisitions as well as funding a progressive dividend.
Last month (21 Jun), Diageo announced the £768m acquisition of super premium tequila Casamigos, a deal boosting its presence in the high-growth US tequila category.
