Guinness parent Diageo restarts plan to return $6.4 billion to shareholders amid strong rebound

Guinness owner Diageo said it would resume plans to return £4.5 billion ($6.36 billion) to shareholders, as its recovery from the COVID-19 pandemic continues to gather pace.

The world’s largest spirits maker postponed its return of capital (ROC) program in April 2020, having bought back shares worth £1.25 billion, due to the impact of the pandemic.

But Diageo
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said it was now ready to restart the program following a strong performance in the first half of the fiscal year. 

The Johnnie Walker and Smirnoff maker said it now expects operating profit to grow by “at least 14% in the full year, slightly ahead of net sales growth.” That convincingly beats the FactSet consensus for 10% operating profit growth.

The company said £1 billion would be paid to shareholders by the end of June 2022, with £500 million of share buybacks by November this year. The program will now be completed by the end of June 2024 — two years later than originally planned.

The stock rose 4% in early London trading following the surprise announcement and is now more than up year-to-date. The U.S.-traded American depositary receipts were 3.8% higher in premarket trading. 

The drinks industry endured a tough 2020 as the COVID-19 outbreaks forced restaurants, bars and pubs across the world to shut for large parts of the year. Diageo profits almost halved in the year ending June 30, 2020 as sales slumped and it was forced to take a £1.3 billion write down. 

The company’s performance was boosted by strong demand for spirits in the U.S., where more people bought alcohol to drink at home. That trend continued into the second half of the calendar year, while the reopening of countries around the world has seemingly improved performance in recent months.

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Diageo said performance in North America, its largest market, remained strong, while Europe was benefiting from off-trade sales — supermarkets and stores — and the partial reopening of bars and restaurants. Travel retail remains “severely impacted,” it added.

Chief Executive Ivan Menezes said: “I am very pleased with how our business is recovering in fiscal 21, our strong competitive performance across key markets and our robust cash generation.”

“When we have excess cash, we have been clear that we will seek to return it to shareholders,” he added. 

He expected the company to be back within the top end of its target leverage ratio of 2.5x to 3x by the end of June 2022.

Read: There’s now an alcohol-free, low-calorie Guinness from Diageo

RBC Europe analyst James Edwardes Jones noted that the company’s guidance for operating profit and sales growth, was “usefully ahead of expectations.” He expected consensus upgrades of 3-4% for 2021 as a result of the trading update.

“Diageo is doing pretty much everything right in its pursuit of becoming a ‘reliable compounder of growth’ in our view, however the consequences of COVID-19 are likely to restrain margin growth from here,” he said, maintaining a ‘sector perform’ rating on the stock.

However, Hargreaves Lansdown equity analyst William Ryder said that while it was good news for investors, there was a case for keeping the share buybacks on ice a little longer, noting that debt is “still higher than ideal” and the leverage ratio target higher than it needs to be.

“What’s more, the shares are currently trading on a forward PE (price to earnings) ratio of 25.7, which is well above the long run average of 19.6. Diageo is a strong business with excellent brands, so while the valuation is relatively high, it’s not ridiculous.

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“However, together, debt and valuation make a reasonable case for delaying further buybacks a little longer.”

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