We've Awarded Diageo an A- Credit Rating

Diageo is the world's largest spirits maker, and the strength of its portfolio is unmatched

Morningstar Credit Committee 13 April, 2010 | 11:19AM
Facebook Twitter LinkedIn

Morningstar is initiating credit coverage of Diageo with a rating of A-, reflecting the company's wide moat and portfolio of premium brands in a stable sector. Diageo's premium positioning leaves the company's portfolio more vulnerable to down-trading in a weak economy; however, the brands are some of the strongest and most well-known in the world and will likely outperform as the economy recovers. Through the end of fiscal 2014 (ended June 2014), Diageo has $4.2 billion of debt obligations that mature, representing approximately half of the company's debt. While we forecast the company will be able to retire the debt with cash flow as it comes due, we expect Diageo to refinance the maturing debt into longer-term notes. Diageo's Solvency Score is rated fair due to the company's leverage, which is high for the rating.

Diageo is the world's largest spirits maker, and the strength of its portfolio is unmatched. With eight of the world's top 20 brands and unrivaled global distribution scale, the firm generates robust free cash flows and has a wide economic moat in our view (read this article for more on how Morningstar measures moats). Brands such as Smirnoff, Baileys, Johnnie Walker, and Jose Cuervo are number one in the world in their respective categories, and the firm's portfolio includes other heavy hitters such as Guinness, Tanqueray, and Captain Morgan. Diageo also owns 34% of upscale champagne and cognac maker Moet Hennessy, a subsidiary of French luxury goods maker Moet Hennessy-Louis Vuitton. Because of its strong portfolio, Diageo has built a distribution fortress. For example, in America (the most profitable spirits market in the world), Diageo has consolidated its distribution base, where allowed, to one exclusive agent per state, covering 80% of its total United States volume. No other firm has come close to replicating this breadth the US.

On the downside, the company's slow earnings growth in the near term could prompt management into making an acquisition to drive growth and increase debt leverage, which would pressure our current rating. In addition, one of the company's largest brands, Jose Cuervo tequila, is not owned by Diageo outright, but is manufactured and distributed under license. This license extends through 2013, and it is uncertain whether Diageo will retain the brand after that.

For fiscal 2010 (June 2010), we are forecasting sales to increase 1.6% to £9.5 billion and EBITDA to increase 9.7% to £3.0 billion with resulting credit metrics of 3.5 times interest coverage, 0.68 debt/capital ratio, and 2.9 times leverage. Based on our five-year forecast, we expect Diageo's cash and cash generation of $12.4 billion will cover total cash commitments of $7.6 billion by 163%.

Read our equity analytst's full report on Diageo here.

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.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Diageo PLC2,395.50 GBX-0.15Rating
© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures