19 May 2025
If you are covering Diageo's latest trading statement, please see the following comment from Chris Beckett, head of equity research at Quilter Cheviot:
“Diageo’s return to quarterly sales reporting is a welcome move ahead of tomorrow’s Capital Markets Day, offering greater transparency at a crucial time for the company. The headline organic sales growth of 6% is impressive, though partially inflated by pre-tariff order phasing. However, the underlying performance – while more modest – is still stronger than the recent share price weakness suggests.
“Encouragingly, Diageo has reiterated its current-year guidance and introduced longer-term cash flow expectations. The Q3 organic sales growth of 5.9% is supported by solid volume growth and price/mix improvements. While the underlying sales trend, adjusting for order phasing, sits closer to 2%, this update signals a much-needed stabilisation.
“From a geographical perspective, North America (up 6.2%), Latin America (up 28.5%), and Africa (up 10.1%) outperformed expectations, with Latin America rebounding sharply after last year’s inventory destocking. However, European spirits (down 0.4%) and Asia Pacific (up 1.6%) showed relative weakness, tempering the overall picture.
“The expected $150m tariff headwind is a manageable challenge, with Diageo anticipating that half of the impact can be absorbed without price increases. FY25 guidance was reaffirmed, indicating a reversal of the order phasing benefit in Q4, with organic sales in H2 projected to improve on H1, albeit with a similar rate of profit decline.
“Importantly, the new CFO’s efforts to enhance communication and guidance – including the reinstatement of Q1/Q3 sales updates – are a positive step. Over the medium term, Diageo expects free cash flow to rise from $3bn this year through FY28, aiding in deleveraging towards its target net debt-to-EBITDA range of 2.5x to 3.0x. This should help dispel concerns over dividend sustainability, currently yielding 3.5%.
“Tomorrow’s CMD will spotlight the Guinness business, which has delivered strong performance despite its unique positioning within Diageo’s broader portfolio. The event will provide valuable insight into management’s commitment to the long-term ownership of the brand.
“With the stock trading at approximately 17.5x calendar 2025 earnings, we view it as offering solid value for investors who, like us, believe in the long-term growth trajectory of premium spirits.”
