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Diageo Hikes Dividend and Plans More Buybacks

FTSE 100 drinks maker, which is currently riding the gin boom, has pushed up its dividend by 8% and plans to return over £4 billion to investors in the coming years

James Gard 25 July, 2019 | 11:24AM

Diageo whisky selection

Shares in FTSE 100 drinks maker Diageo (DGE) slipped despite posting a positive set of full-year results.

A rise in operating profit of 9.5% slightly missed expectations, but analysts argue that other factors may be at work.

“The shares dropped back slightly in early trading, but that is probably just some profit-taking given that they’ve outperformed the market over the past year,” said Ian Forrest, investment research analyst at The Share Centre.

The full-year dividend will be 68.57p, the company announced, up from last year’s 63.4p, a rise of 8%. Diageo will also return £4.5 billion to shareholders between 2020 and 2022; £2.5 billion was returned to investors via buybacks in the financial year just gone. While a yield of just under 2% does not match up to the likes of GlaxoSmithKline and Royal Dutch Shell, its dividend cover at above 2% is one of the highest among FTSE 100 income stocks. Dividend cover shows how much of a company’s payouts are “covered” by earnings; so in this case Diageo’s full-year dividend can be paid out twice by annual profits.

Diageo is rated as a two-star stock by Morningstar analysts, which means that it is significantly overvalued. Analyst Philip Gorham increased the “fair value” estimate for Diageo to £27 in June this year to £27, but this is still below the current share price of £33.53. The company’s share price started the year around this fair value, around £27, but have significantly outperformed the FTSE 100 this year with a gain of 24% to £33 per share.

Morningstar assigns Diageo a “wide economic moat”, which means that it has a strong competitive advantage: “We are retaining our wide moat rating for Diageo, a business we think is among the better positioned in the long term for the intensifying threats in the consumer goods industry. However, we believe near-term expectations are slightly frothy and the stock is a little overvalued at current levels.”

Diageo’s sales were up 6% in the year to just under £13 billion, helped by a 22% rise in gin sales.

Results from FeverTree (FEVR) this week highlighted the ongoing growth of gin as a drinks category; Diageo said that sales of the Tanqueray and Gordon’s gin grew by double digits in Europe in the year. Another trend noted by FeverTree is that of “ready-to-drink” spirits, a category that expanded 17% for Diageo, led by Gordon’s ready mixed gin and tonic.

The threat of US tariffs on whisky still overshadows the global drinks industry and Diageo is not immune to global trends. Morningstar’s Gorham believes that the current popularity of branded spirits, which are more expensive than beer and wine, is a reflection of where we are in the economic cycle. “As demonstrated during the global financial crisis a decade ago, demand for spirits can be less defensive than other staple products,” he argues.


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Diageo PLC3,105.50 GBX-0.11

About Author

James Gard  is content editor for Morningstar.co.uk

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