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Diageo Expecting Double-Digit Profit Growth This Year

Published on May 12 2021 8:41 AM in Drinks tagged: Diageo / spirits / Guinness / Drinks / Smirnoff

Diageo Expecting Double-Digit Profit Growth This Year

Diageo has said that it expects operating profit to grow by at least 14% in its current financial year, slightly ahead of organic net sales growth, as the drinks maker continues to experience a strong recovery.

The Guinness and Smirnoff owner said in a trading update that its business has 'continued to deliver a good recovery across all regions', with North America 'particularly strong' and Europe seeing 'strong execution' in the off-trade channel.

'Robust Cash Generation'

"I am very pleased with how our business is recovering in fiscal 21, our strong competitive performance across key markets and our robust cash generation," commented chief executive Ivan Menezes.

"Our disciplined approach to capital allocation is unchanged. Our priority remains to invest in the business to deliver sustainable and efficient organic growth and to pursue acquisitions that further strengthen our exposure to attractive categories."

Capital Programme

The group has announced the restart of its capital return plan, initially announced in 2019, which will see it return 'up to £4.5 billion to shareholders in the period to June 2022, utilising the most appropriate mechanic of either share buybacks or special dividends depending on market conditions'.

This programme has now been extended to June 2024.

"When we have excess cash, we have been clear that we will seek to return it to shareholders," Menezes added. "The board’s decision to resume our return of capital programme 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 ratio1 of 2.5-3.0x at 30 June 2022, post completion of the second phase of the return of capital programme."

The pandemic had hammered sales at spirits makers as restaurants, bars and other entertainment avenues were closed to contain the outbreak, but restrictions are being gradually lifted in major countries this year amid vaccination drives.

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The robust showing comes after Diageo surprised markets in January by returning to organic sales growth for the six months to December 2020, thanks to a jump in demand for premium tequila and bourbon at U.S. retail stores. Organic operating profit had shrunk 3.4% for the first half.

The group has also announced a number of recent acquisitions and business expansion plans.

Analyst Viewpoint

Commenting on Diageo's trading update, analyst Russ Mould from AJ Bell said, “Like several businesses, Diageo hoarded cash during the pandemic to help get it through, now profit is expected to bounce back quicker than expected it can afford to be more generous.

“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.

“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.”

News by Reuters, additional reporting by ESM. For more Drinks news, click here. Click subscribe to sign up to ESM: European Supermarket Magazine.

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