4 February 2025
If you are covering Diageo’s half year results please find commentary below from Chris Beckett, head of research at Quilter Cheviot:
“Diageo’s half-year results today are satisfactory and likely exceeded market expectations. We have been anticipating a stabilisation in its performance, and with sales up by 1% and profits down by 1%, this is the stabilisation we were looking for.
“The market might react negatively to the removal of the medium-term guidance of 5% to 7% organic sales growth. This target was set during the pandemic when demand was exceptionally high, making it unrealistic in the current environment. While we are not overly concerned about the removal of this guidance, it is likely to be poorly received by some.
“Diageo’s new finance director has made this decision, which we view as the most significant of the necessary adjustments, and it is something we can accept. The company remains positive about the spirits market, premiumisation, and structural trends. Notably, North American sales are stable, and Latin America has returned to growth, which is encouraging given past inventory issues in that region.
“Guinness continues to perform well, and while some tequila brands are thriving, others are not. There are both positives and negatives across different categories and brands. Margins have decreased slightly due to higher overheads and reduced marketing spend, which is not ideal from the market’s perspective which would prefer it the other way around.
“Diageo carries a significant amount of debt, but it appears to be managing it effectively, maintaining an unchanged dividend despite concerns of a potential cut. The company is taking steps to manage leverage through increased capital discipline and selective disposals, such as selling its beer business in certain African countries. However, it needs to be strategic to avoid debt issues.
“Overall, we view these results as solid. Diageo is trading at less than 17 times this year’s earnings, which should be the trough year. The spirits market has faced challenges over the past few years, but Diageo is well-positioned. We do not believe there has been a fundamental decline in demand for high-quality spirits brands; rather, there has been a temporary soft patch that will recover.
“Rumours of a Guinness spin-off seem to have been dismissed. Diageo owns 34% of Moet Hennessy, part of LVMH, and would like to acquire the remaining stake. However, this is only feasible if it sells Guinness, given its current balance sheet constraints. The sale of Moet Hennessy was denied in LVMH’s recent press conference, and we do not anticipate a sale of Guinness at this time.
“Looking ahead, the second half is expected to be similar if tariffs are not imposed. While some mitigation is possible, tequila must come from Mexico and Canadian whisky from Canada, which could pose challenges."
