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Stocks in Focus: Diageo

This week I’m looking at Diageo, the world’s largest spirits company, following its recent preliminary results for the year ending 30 June 2018.

The results were better than expected following an increase in revenues and profits, despite growth being partially offset by adverse moves in currency exchange rates.  The company reported net sales of £12.2bn, an increase of 5%, slightly ahead of the 4.3% that had been forecast by management.

The company's largest gin brands have been especially successful in the last year, with Tanqueray gin performing well and the launch of Gordon’s pink gin providing a boost. Sales of gin have been helped significantly by a gin boom in Western Europe, as well as increasing popularity of colourful drinks and cocktails among millennials. The 14% increase of gin sales was only outperformed by tequila, which saw sales soar by 56%, with much of the growth coming from the US and Mexico. Due to the success of tequila in recent years, the company has continued to expand its portfolio via the $1bn acquisition of George Clooney’s premium tequila brand ‘Casamigos’. Vodka was the only category to decline in the last year, with Smirnoff sales down 2%. 

Although sales growth has been positive, management have forecast headwinds for the new financial year. Potential issues include exchanges rates, which management expect will reduce full year sales by up to £70m and operating profit by £10m. There is also the potential for higher interest rates, which would increase the cost of borrowing, and an increase in tax rate is also expected.

Despite the concerns, the board announced an additional share buyback programme of up to £2bn as a result of the strong cash flow figures. Having already returned £1.5bn to its shareholders over the last year, this move should reassure shareholders about the future prospects for the group.

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