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Diageo raises share buybacks and dividend as operating profit and sales beat forecasts

Diageo said it continues to expect to deliver "mid-single digit" organic net sales growth for the year

Shares rose 3.6% in morning trading

Spirits maker Diageo plc (LON:DGE) announced a further £600mln of share buybacks and raised its interim dividend by 5% as higher taxes dragged first-half net profit lower.

The owner of Johnnie Walker whisky and Tanqueray gin said net profit fell to £1.98bn in the six months to December 31 from £2.06bn a year ago.

READ: Diageo sells off 19 brands including Seagram’s whiskeys to Sazerac for US$550mln

But operating profit, the company’s preferred measure, rose to £2.43bn from £2.19bn last year, beating analysts’ expectations of £2.31bn. The organic operating margin rose by 152 basis points. 

Net sales, which exclude duties, increased to £6.91bn from £6.53bn the prior year, compared to market forecasts of £6.78bn. Organic sales rose 7.5%.

"Diageo delivered broad-based volume and organic net sales growth across regions and categories,” said chief executive Ivan Menezes.

The company delivered free cash flow of £1.3bn, up £317mln on a year ago.

Further share buybacks and higher dividend 

Given its strong cash position, the company decided to increase its share buyback programme, taking its total for the year ending June 30 to £3bn.

The interim dividend was lifted to 26.1p per share from 24.9p last year.

“This half has benefitted from some one-time and phasing gains in both organic net sales and operating profit, and therefore we continue to expect to deliver mid-single digit organic net sales growth for the year and to expand operating margins in line with our previous guidance of 175 basis points for the three years ending 30 June 2019,” Menezes said.

In morning trading, shares were up 3.6% to 2,873p.

Drinks brands disposal to fund shareholder returns

Diageo is using some of the proceeds from the US$550mln disposal of 19 drinks brands to US-based Sazerac to help fund the shareholder returns. The brands that were sold included some of its Seagram’s whiskeys and Parrot Bay rums along with Myers’s, Romana Sambuca, Goldschlager and Booth’s.

The disposal was announced after the group warned in September that it expects foreign exchange headwinds to have a bigger impact than previously estimated on sales and profits in the current financial year.

It predicted a hit of £175mln to net sales and £45mln to operating profit, compared to its July guidance of £70mln and £10mln respectively.

Liberum maintains 'hold' rating, prefers AB InBev

Liberum maintained a 'hold' rating on the stock with a target price of 2,800p, saying that while the first-half results beat expectations, the outlook was not raised.

"The group is a juggernaut in the beverages world: its unrivalled portfolio of leading brands and scale provides it with a wide economic moat, which can be observed by its leading spirits margins and CROCEs.

"Our enthusiasm is tempered by an expensive valuation relative to history, a long tail of standard spirits which are in structural decline, an unwillingness to commit to the US spirits growth rate (suggesting the 5% seen today in the 1H results is hard to repeat) and a mixed M&A track record that risks value destruction.

"We have a preference for the value end of our beverages and tobacco coverage, specifically AB InBev and Imperial Brands. "


Quick facts: Diageo PLC

Price: 2932.5 GBX

Market: LSE
Market Cap: £68.59 billion

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