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Net sales for the full year of £15.5bn reflects organic growth of 21.4%, driven by double digit growth across all regions. Operating profits grew 26.3% organically, to £4.4bn, with more efficient supply chains and price increases offsetting the impact of rising costs.
The board has proposed a final dividend of 46.82p, up 5%. £3.6bn of the £4.5bn share buyback has been completed, the remainder due to complete in the new financial year.
The shares rose 1.1% following the announcement.
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Our view
Full year results reflected a budding recovery in bar and restaurant sales following last year’s restrictions. Truth be told, this was a strong set of results in what are challenging circumstances – testament to the strength of Diageo’s brands.
By no means is Diageo immune to pressures, though. The kind of growth seen last year is expected to moderate over the next twelve months, with medium-term net sale growth expected in the mid-single digit range.
Whisky is an especially attractive market because it takes a lot of up-front investment and time for a newcomer to compete. Good whisky needs to be aged, so a new competitor would need to be comfortable waiting for their investment to pay off. Alternatively, they could buy existing distilleries and spend heavily on marketing, but scaling up would be difficult and expensive. Strong brands and barriers to entry have meant attractive margins in normal times.
A growing middle class in emerging markets is playing into the group’s hands. It has attractive positions in the key Chinese and Indian markets, and as consumers move up the value chain, Diageo is waiting for them with Black, Blue and Double Black labels.
That said, performance in developed markets hasn’t been entirely plain sailing in recent years. Offloading a selection of smaller brands shifts the dial towards sales of more lucrative products.
For now, that looks to be the right move, as consumers continue to brush aside cost of living pressures and favour more premium brands.
Looking to the balance sheet, Diageo’s in a decent position. The ratio of net debt to cash profit has come back down into a comfortable range as profits recovered. We wouldn’t mind the absolute value of debt coming down a little further, to give a cushion if things turn.
Recent dividend decisions have continued an enviable record of growth that stretches back to the 1990s but it should be remembered all dividends are variable and not guaranteed.
With a world class stable of brands and exposure to emerging markets, the group has some enviable advantages. It’s well positioned to benefit from a recovery and there are some long-term attractions. Keep in mind, the valuation means there’s pressure to deliver.
Diageo key facts
- Forward Price/earnings ratio: 23.1
- Ten year average Price/earnings ratio: 20.9
- Prospective dividend yield (next 12 months): 2.2%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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Full Year Results (sales growth organic)
In North America, net sales grew 14% to £6.1bn. That was largely driven by US spirit sales where bars and restaurants recovered well, while supermarket sales remained resilient. US Spirits growth was primarily driven by tequila, up 57%, as well as double-digit growth in scotch and US whiskey. Higher sales and price hikes more than offset an increase in costs from marketing and inflation, underlying operating profit rose 10% to £2.5bn.
Europe reported net sales of £3.2bn, up 30%. Growth reflects the recovery of bar and restaurant sales, particularly in Ireland, Great Britain and Southern Europe. Cost inflation was more than offset by higher sales and higher prices, underlying operating profit rose 60% to £1.0bn.
Net sales grew 16% in the Asia Pacific region, to £2.9bn. That was driven by strong growth in India and Greater China, and a partial recovery of Travel Retail Asia and Middle East. Underlying operating profit rose 17% to £711m.
Africa saw growth across all markets with net sales up 22% to £1.7bn. Operating profit grew 84% to £315m, as price increases and cost saving more than offset inflationary pressure.
Latin America and Caribbean reported net sales of £1.5bn, up 43% with double digit growth across all markets. A higher proportion of premium brand sales and price increases mostly offset marketing investment and cost inflation, which meant operating profit grew 78% to £538m.
Free cash flow dropped £0.3bn to £2.8bn. Net debt stands at £14.1bn, with the group’s ratio of underlying net debt to underlying cash profit (EBITDA) down from 2.8 to 2.5, at the lower end of target range.
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