Stocks in Focus: Diageo

This week Neil Trickett of NW Brown looks at Diageo, the global alcoholic beverages company. 

Diageo released 2019 preliminary results last week. The company reported growing sales and operating profit however there was an increased marketing spend especially in the US. This saw the share price fall 2.5% on the day as future growth missed analyst’s estimates.

The company has approved cash returns of £4.5bn for the fiscal years 2020 to 2022 including an increase in dividend by 5%. This return of cash to shareholders is on the back of a ‘strong free cash flow’ of £2.6bn to the company.  This provides the company with flexibility to consider either special dividends or further share buy-backs although the latter are less accretive to shareholders if a company is trading on a higher valuation.

Marketing spend was up by an average of 8% across the group, which has been attributed to ‘increased investment in beer and gin’ including the Guinness sponsorship for the Six Nations rugby tournament. There was a silver lining, however, in that Diageo has claimed its advertising is being carried out in a more efficient manner, and this could be helping top-line growth.

The company has also been monitoring the cannabis industry, an area touted for future growth. Some rivals have invested into the sector with Constellation Brands buying 40% of Canopy Growth, the world’s largest cannabis firm. However Diageo have stated that they want to understand consumer behaviour before committing to such an endeavour in such a nascent sector.

The company is still tilted to the ‘premiumisation’ trend: people drinking less but consuming higher quality alcohol, which industry experts expect to continue. However investors will expect the increased investment in marketing and other products to drive future growth, as expenditure growing at a higher rate than sales would be a cause for concern.

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