Shares in Diageo (DGE) bubbled up 3% to £25.97 on Thursday, the world’s largest spirits maker joining in the wider market rally despite withdrawing 2020 financial guidance and suspending share buybacks for the rest of the year due to the coronavirus pandemic.
The alcoholic beverages behemoth caught a bid as it assured it would still pay a recent dividend, stressed its formidable liquidity and said it is slashing non-essential spend to see it through the crisis.
Investors’ spirits were also raised by positive soundings from chief executive Ivan Menezes, who expressed confidence in Diageo’s ‘long-term strategy and ability to move quickly in this difficult environment’, adding his charge ‘will continue to execute with discipline and invest prudently to ensure we are strongly positioned for a recovery in consumer demand.’
DAMAGE FROM SOCIAL DISTANCING
In February, Diageo served up a profit warning as the coronavirus hit its businesses in China, where bars and restaurants are gradually re-opening, and the wider Asia Pacific region.
Sadly, the dreaded virus has spread to most of Diageo’s other markets (Europe, North America, India and Africa), forcing the drinks colossus to update the market again.
‘Widespread containment actions put in place by governments across the globe in March, including the closure of bars and restaurants, are having a significant impact on the performance of our business,’ warned Diageo, which is going above and beyond to battle the coronavirus.
The FTSE 100 giant is not only donating alcohol to make more than 8m eight bottles of sanitiser for frontline healthcare workers around the world, it is also providing support packages for bartenders and others impacted by pub and bar closures.
Nevertheless, given the global nature of the pandemic and the ‘uncertainty around the severity and duration of the impact across multiple markets’, the Johnnie Walker maker is ‘not in a position to accurately assess the impact of this on our future financial performance’ and is ‘withdrawing our guidance on group organic net sales growth and organic operating profit growth for fiscal 2020.’
The Captain Morgan rum-to-Tanqueray gin maker has already returned £1.25bn under its three year, £4.5bn share buyback programme. Yet given the need to be financially prudent, it has not initiated the next phase of the buyback and ‘will not do so during the remainder of fiscal 2020.’ However the 27.41p interim dividend announced on 30 January will be paid out.
‘We have a strong balance sheet and at 31 December 2019, our adjusted net debt to EBITDA ratio was 2.8 times’, stressed Diageo, which recently issued £1.9bn of new euro and sterling bonds to boost liquidity and can also count on considerable committed bank facilities of £2.8bn.
THE EXPERT’S VIEW
Russ Mould, investment director at AJ Bell, explained: ‘Investors will be very thirsty for income as dividends from UK stocks increasingly dry up, so they may well be raising a glass to Diageo’s decision to pay its interim dividend’, although the move is ‘worth placing in context.
‘The drinks manufacturer was a fair way down the road in terms of doling out the cash, having declared the dividend in January, and, notably, buybacks are off the table for the rest of the year.
‘The company has a lot of debt but not all borrowings are equal and crucially it has no financial covenants attached to any of its debt – or in other words even with a significant drop in earnings there’s seemingly no chance of lenders reacting by issuing penalties or taking assets.’