Get a buzz with Diageo shares

The recent disposal is expected to trim earnings per share (EPS) this year by a relatively modest 1.9p, but should improve longer-term growth prospects. In particular, it should help support US growth. Broker UBS calculates that the 19 brands created a 0.5 percentage point drag on US spirit sales last year.

The change to the brand portfolio through the disposal has helped buoy hopes that Diageo will be able to achieve an organic sales growth rate of 4-6 per cent over the medium term, well balanced between developed and emerging markets. This would represent a marked step up from the relatively flat organic sales being reported by the drinks giant only a few years ago. Encouragement has also recently been taken from full-year results, which beat consensus expectations on organic growth in sales, profits and margins. This was was achieved despite a number of market headwinds. What's more, sales growth was split fairly evenly between volume and price. Such balanced progress suggests a sustainable growth trend. All in all, the focus on 'premiumisation' looks to, so far, be on track, which was reflected in 14 per cent in reserve sales - top-end brands accounting for 18 per cent of last year's revenue. 

A key advantage of owning many of the world's top alcohol brands is reflected in Diageo's enviable operating profit margin, which was over 30 per cent last year. There are also hopes that the group can beat its target of raising margins by 1.75 percentage points in the three years to mid-2019, which will be assisted by a cost savings programme targeting £700m in efficiencies.

But Diageo’s progress hasn’t been without challenges. In September, the spirits company announced that foreign exchange volatility in emerging markets would wipe £175m off net sales and £45m off operating profit this year. Nevertheless, the shares ended up 2 per cent on the day of the announcement. The muted reaction could be because the problems were currency-related, rather than structural. The cuts to forecasts are also marginal in the context of Diageo’s scale.

And although not all of Diageo's product lines are growing, there's encouragement to be had from the way the company is dealing with adversity. While most categories are growing, vodka has seen sales fall, especially in the US. However, the company is responding with product innovation. For example, it has introduced Ketel One Botanicals to its premium Ketel One vodka range – a lower calorie version with three flavours focused on natural ingredients. The aim is to replicate the success of products such as Crown Royal Regal Apple – a flavoured version of its Crown Royal Canadian whiskey, which added a new customer base without eating into existing sales.

Other recent product innovation successes have been Hop House lager – a lighter take on Guinness beer – along with Gordon’s pink gin and Baileys made with almond milk. Brexit should not pose too much of a threat to any existing or new products. Indeed, if the UK were to leave the EU without a deal and revert to World Trading Organisation rules then spirits would not carry a tariff.