- Full-year sales and profit disappoint
- Strong growth in operating cash flow
- Dividend hiked by 5%
Spirits maker Diageo (DGE) managed to undershoot consensus full-year sales and profit expectations despite a fairly ‘low bar’ driven by downward estimate revisions.
The disappointment spurred a 9% fall in the shares to a new seven-year low of £23.05, taking 12-month losses to 33% compared with a 7% gain for the blue-chip FTSE 100 index.
WHAT DID THE COMPANY SAY?
The world's largest alcoholic drinks firm continues to grapple with weakness in the LAC (Latin America and Caribbean) region which led to a previous profit warning in November 2023.
In the year to the end of June, the region suffered a 21% drop in volumes which meant group sales declined for the first time since the pandemic falling 1.4% to $20.3 billion.
Chief executive Debra Crew commented: ‘Fiscal 24 was impacted by materially weaker performance in LAC. Excluding LAC, organic net sales grew 1.8%, driven by resilient growth in our Africa, Asia Pacific and Europe regions.
‘This offset the decline in North America, which was attributable to a cautious consumer environment and the impact of lapping inventory replenishment in the prior year.
‘We ended our 2024 financial year gaining or holding share in measured markets totaling over 75% of our net sales value, including in the US.’
The fall in sales translated into a $304 million or 4.8% drop in organic operating profit, of which $302 million was attributable to LAC, equating to a 1.3% contraction in operating margin on sales.
Despite these challenges, the company continues to generative healthy operating cash flows which increased 14% year on year to $4.1 billion while free cash flow jumped 18% to $2.6 billion.
This allowed Diageo to recommend increasing the annual dividend by 5% to $1.0348 per share as well as completing a $1 billion share buyback programme announced on 1 August 2023.
EXPERT VIEW
Not pulling any punches, investment director Russ Mould at AJ Bell commented: ‘Diageo has gone from bad to worse. It has reported an operating profit decline in four out of its five operating regions, two of them in substantial double-digit territory.
‘The company can dress up the numbers all it wants, but it’s clear something major has to change.
‘Investors won’t like the figures. Nor will they like the absence of a new share buyback programme and the fact the balance sheet is close to getting out of the company’s comfort zone.
‘Diageo targets two-and-a-half to three times net debt to adjusted earnings and the leverage ratio is now sitting at the top end.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Martin Gamble) and the editor (Ian Conway) own shares in AJ Bell.
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