From Hargreaves Lansdown 9^th April 2020
Diageo
<https://www.hl.co.uk/shares/shares-search-results/d/diageo-plc-ordinary-28-101108p>'s
sales have fallen significantly following the closure of bars and
restaurants around the world in response to COVID-19.
The group has confirmed that its interim dividend of 27.41p per share
will be paid as scheduled. However, the £4.5bn share buyback programme,
of which £1.25bn has already been completed, is being paused until the
end of June.
The company has also withdrawn all previous guidance for this financial
year.
Diageo's feeling the bite of government lockdowns and we expect the
drinks giant to have a rough quarter or two as a result. We think the
group's brands are strong enough to fuel a recovery when life returns to
normal though.
The group owns established and well-marketed brands like Guinness,
Gordon's and Johnny Walker, as well as a broad enough portfolio to
hopefully take advantage of whatever the flavour of the recovery turns
out to be.
That said, performance in developed markets hasn't been such plain
sailing in recent years. Offloading a selection of smaller brands shifts
the dial towards sales of more lucrative products but the remedial work
isn't over. Management had planned further investments to help build
momentum, although COVID-19 may put these on hold for a while.
Elsewhere 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.
Turning to the balance sheet, Diageo was carrying 2.8 times cash profits
as net debt on 31 December 2019. It's issued more debt since then to
shore up short term liquidity, and absent a sustained recession we think
the group has enough cash on hand to keep the stills running. However,
debt was closer to the top than the bottom of the target range to begin
with. If debt spikes in the coming months some effort will have to be
made to bring it down in the future - potentially denting shareholder
returns.
The recent 5% dividend increase continued an enviable record of growth
that stretches back to the 1990s. All the more impressive given there
have been a string of buybacks too, though these have been put on ice
for the time being. With a world class stable of brands and exposure to
emerging markets the group has some enviable advantages. However, no
investment's a sure thing, and in the face of a recession or changing
tastes Diageo may have its work cut out and the dividend could suffer.
The shares currently offer a prospective yield of 3.0%.
Bars and restaurants account for 20% of spirit sales in the US and 50%
in Europe. As the majority of US states and European countries have
imposed some form of "lockdown", trade in these venues has been
significantly impacted. Diageo has seen some pick up in sales from
retail stores, although it is unclear whether this will be sustained. In
mainland China, trade in bars and restaurants is starting to recover.
Disruption to travel retail sales was initially confined to just the
Asia Pacific region, although it has now spread to other markets as
governments have imposed travel restrictions.
In India the government has shut both venues and retail stores, as well
as some production facilities. Other markets, including Africa and Latin
America, have also seen disruption.
As of 31 December 2019, Diageo had net debt (debt minus cash) equal to
2.8 times cash profits. None of this debt contains any restrictions from
lenders, known as covenants. To support its liquidity Diageo recently
issued £1.9bn of new debt, and also has £2.8bn in committed bank facilities.
Price today Friday 19^th 2621.50p
Showing a profit since purchase.
I therefore recommend Hold or Buy more as the shares will undoubtable
rise after Covid 19 disappears.
Peter Dixon
