Diageo recovers on the back of premium brands

There is a debate amongst retail analysts as to whether brand cachet means as much as it used to. It has been triggered by the rise of generic or ‘own brand’ grocery lines, but if you were to review Diageo’s (DGE) full-year figures it’s plain that iconic brands like Johnny Walker, Gordon's and Guinness have as much pull as ever. Premium and high-end brands contributed to nearly half of Diageo’s net sales growth in fiscal 2021.

The group revealed organic net sales growth of 16 per cent through to 30 June, courtesy of a positive price mix and surging volumes in its US markets, as distributors and retailers rebuilt stock levels. It should be noted that on-trade sales across the pond took a wallop when Covid-19 raised its head.

All geographies turned in positive performances, coupled with “broad-based” growth across the group’s liquor categories. It is difficult to gauge how well the group is trading based on comparators with FY2020, a one-off year by any measure. But shareholders can take encouragement from the fact that net sales growth in three of the group’s five geographic regions is ahead of pre-pandemic levels.  

Home entertaining gained in popularity during the lockdowns. Diageo managed to maintain its leading off-trade market share, but beer sales tanked in Europe due to the widespread closure of pubs, restaurants and bars.

Operating profit increased by three-quarters to £3.7bn, reflecting runaway growth in the underlying margin, though reported profitability was constrained in the prior year due to exceptional operating items. The growth in profits through the year contributed to a 58 per cent rise in net cash from operating activities to £3.7bn, aided by tightened working capital management and a delayed 2019 dividend from associates.

Much depends on whether we’re all slung back into lockdown when the northern winter returns. But management is confident that net sales momentum will continue into FY2022, with North America market growth gradually returning towards historical levels of mid-single digits.

A lingering issue is the extent to which socialising and drinking habits have been altered permanently by the lurgy. It will have a direct bearing on profitability and, by extension, distributions. For now, directors have recommenced the return of capital programme, originally pitched at £4.5bn in the form of share buybacks and/or special dividends. UBS arrives at an enterprise/cash profit multiple of 23.5, falling to 21.8 in FY2022, and it’s that debt overhang which keeps us on the side-lines. Hold.