Shares in alcoholic drinks giant Diageo (DGE) weakened 19.25p to £30.91 on Thursday after the Johnnie Walker whisky-to-Smirnoff vodka maker downgraded this year’s top line growth guidance to reflect a tough first half, emerging market headwinds and very demanding comparatives.
Eagle-eyed investors won’t have been caught off guard by news of a soft first half from Diageo.
At September’s AGM, the FTSE 100 spirits giant said it expected first half organic operating profit growth to be ‘in-line with or slightly behind organic net sales growth’, and also warned it would ‘not be immune from significant changes to global trade policy’.
PRUDENTLY DOWNGRADING GUIDANCE
In today’s first half results statement, the Don Julio tequila-to-Captain Morgan rum maker revised down its full year 2020 net sales growth guidance, with chief executive Ivan Menezes now expecting ‘organic net sales growth to be towards the lower end of our 4 to 6% mid-term guidance range’.
The downgrade reflects a cocktail of factors. Diageo is witnessing increased levels of emerging markets volatility in places like India and Latin America, while also experiencing challenging trading conditions in Hong Kong and the Middle East.
Menezes and his team remain concerned over global trade policy and the potential for the coronavirus to dent China and airport demand.
Furthermore, the beverages business is lapping exceptional prior year comparatives following the strong performance achieved by ‘White Walker by Johnnie Walker’, with US tariffs and the strength of the pound creating additional headwinds.
CASH MACHINE YOU CAN COUNT ON
Despite these challenges, Diageo’s results for the six months to December were still very robust. The steady performer reported organic sales growth of 4.2%, in line with consensus and reflecting growth across regions and categories.
Organic operating profit grew by a better than expected 4.6%, although reported earnings per share was down 2.1% due in part to a one-off settlement with the French taxman.
During the half Diageo, a play on a rising middle class in developing economies, delivered almost £1bn of free cash flow and returned £1.1bn in buybacks to shareholders who are also being treated to a 5% hike in the half time dividend to 27.41p.
READ MORE ABOUT DIAGEO HERE
Liberum Capital is lukewarm on Diageo with a ‘hold’ rating. The broker commented: ‘Diageo is a juggernaut in the beverages world with a broad portfolio of brands, providing the company with the scale and a wide economic moat, which can be observed by its industry-leading margins’.
However, Liberum’s enthusiasm is ‘tempered by a slow start to full year 2020. We have a preference for the stocks trading at a steeper discount to staples peers with more scope for improvement to their respective equity stories, specifically Unilever (ULVR) and Imperial Brands (IMB).’
