- Johnnie Walker maker’s organic sales grow 9.4%
- Dividend raised 5% to 30.83p
- But US growth slowdown spooks investors
Johnnie Walker whisky-to-Smirnoff vodka maker Diageo’s (DGE) first half sales beat estimates as the world’s biggest spirits maker raised prices and drinkers shrugged off the inflationary squeeze to keep spending on premium spirits.
However, shares in the FTSE 100 drinks giant slipped 6.6% lower to £34.34 as the company reported a growth slowdown in the important US market, where Diageo generates half of its earnings.
DIVERSE DRINKS PORTFOLIO SHOWS STRENGTH
Solid results for the half to 31 December 2022 demonstrated the strength and diversity of Diageo’s rich portfolio of brands, which spans iconic stout Guinness, Tanqueray gin, tequila brand Casamigos and the recently acquired Don Papa, a super-premium dark rum from the Philippines, to name but a few.
Organic net sales fizzed up 9.4% in the half with Diageo serving up growth in all regions. This growth exceeded the 7.9% analysts were calling for, driven by a combination of price rises and organic volume growth of 1.8%.
Diageo’s reported operating profit grew 15.2% to £3.2 billion as the company delivered growth across most categories, spearheaded by scotch, tequila and beer and with more expensive ‘premium-plus’ brands driving 65% of the organic net sales growth.
Shareholders with a thirst for income were also sated as Diageo upped the interim dividend by 5% to 30.83p.
SALES SLOW IN NORTH AMERICA
Booze is supposed to be pretty recession resistant, but Diageo sparked some concern from investors by reporting slowing growth in its key North American market.
Here, organic net sales grew by a sluggish 3%, as Diageo lapped the prior year’s demanding double-digit growth comparative.
Diageo expects organic sales growth to ‘continue to normalise through the second half of fiscal 23’ in North America, while it also sees organic sales growth in Europe moderating in the second half as it laps the boom in sales that followed the post-Covid reopening of the hospitality trade.
WHAT IS THE CEO SAYING?
CEO Ivan Menezes pointed out that today, Diageo is ‘36% larger than it was prior to Covid-19, reflecting the strength of our diversified footprint and advantaged portfolio. As we look to the second half of fiscal 23, whilst the operating environment remains challenging, I remain confident in the resilience of our business and our ability to navigate volatility.’
Menezes believes his charge is ‘well-positioned to deliver our medium-term guidance of consistent organic net sales growth in the range of 5% to 7% and sustainable organic operating profit growth in the range of 6% to 9% for fiscal 23 to fiscal 25.’
EXPERT VIEWS
Edison’s Neil Shah commented: ‘The glass remains more than half full for Diageo after a strong set of results in the face of industry inflation.’
Shah added that ‘shareholders will raise a glass at the company’s pledge to return up to an addition £0.5 billion of capital to shareholders in fiscal year 2023.’
Charlie Huggins, head of equities at Wealth Club, stressed that Diageo looks better placed than most to weather the storm.
‘It is much easier to raise prices on a bottle of Johnnie Walker than on a bottle of shampoo or deodorant. So Diageo ought to have more pricing power than most consumer goods peers. This is a key reason for its resilient margins.
‘If the economy hits the rocks, Diageo may see some downtrading to less expensive brands. But it’s unlikely consumers will cut back significantly on alcohol. And long-term premiumisation trends are unlikely to abate.
‘Overall, Diageo is demonstrating why it is considered a high-quality long-term compounder. While short-term blips can’t be ruled out, investors who abide by the famous Guinness slogan - “Good things come to those who wait” - could be rewarded.’
