Shares in Diageo (DGE) topped the FTSE 100 on Wednesday, fizzing 3.4% higher to £32.99 on news the spirits maker is restarting a bumper capital returns programme interrupted by the pandemic after continuing to see ‘a good recovery across all regions’.
One of Shares’ key selections for 2021, the world’s largest distiller sensibly hoarded cash during the Covid crisis, but with profit bouncing back quicker than expected, it can now afford to be more generous in returning capital to shareholders.
ORGANIC GROWTH & BUYBACKS RETURN
In a short update, the Johnnie Walker-to-Smirnoff maker said it expects organic operating profit growth to be at least 14% in the year to June 2021, ‘slightly ahead’ of organic net sales growth.
Given this strong performance, the spirits titan is recommencing its return of capital programme of up to £4.5 billion.
‘When we have excess cash, we have been clear that we will seek to return it to shareholders,’ explained Ivan Menezes, CEO of the beverages behemoth behind the Guinness, Captain Morgan and Tanqueray brands.
He said the decision to resume capital returns at this time ‘reflects Diageo’s improved performance in the first half of fiscal 21, the continued strong recovery of our business, and our expectation that we will be back within the top end of our target leverage ratio of 2.5-to-3 times at 30 June 2022, post completion of the second phase of the return of capital programme.’
Menezes also expressed confidence that his charge will ‘continue to execute effectively in this challenging environment and will emerge stronger’ from the pandemic.
Diageo returned to organic net sales growth in the first half to December and has continued to deliver a good recovery in 2021. Performance in North America, Diageo’s biggest market, has ‘remained particularly strong, reflecting resilient consumer demand, the breadth of our portfolio and the effectiveness of our marketing and innovation’.
In Europe, the drinks giant is benefitting from ‘strong execution’ in the retail channel and the partial re-opening of bars, clubs and restaurants in certain markets.
In Africa, Asia Pacific and Latin America and the Caribbean, it is seeing ‘a continued recovery in most markets, despite the ongoing impact from Covid-19’.
THE EXPERT’S VIEW
‘Diageo is getting a big round in for shareholders,’ said AJ Bell investment director Russ Mould. ‘The alcoholic drinks group’s recovery from Covid-19 means it is set to dole out billions in share buybacks and special dividends.
‘With its on-trade sales in bars, clubs and restaurants virtually disappearing for large parts of 2020 and the beginning of 2021 the company did a good realignment job – focusing its marketing on the off-trade as people enjoyed their Guinness or Johnnie Walker at home instead.
‘Now things are reopening Diageo is likely to see hospitality-linked sales recover with the only area still severely impacted being sales in airports and other travel hubs.
‘The company’s main focus is on the manufacture of spirits and this industry has some winning attributes for a market leader like Diageo as consumption is increasing in both developed and emerging markets, the relative costs of making it are low and yet brand power allows it to be sold at a premium price.’