Diageo outlook cautious despite earnings rise

Diageo outlook cautious despite earnings rise

London: Diageo Plc, the world’s biggest spirits group, expects slightly higher profits growth this year driven by developing markets but a cautious outlook hit its shares after meeting forecasts for annual earnings.

The London-based maker of Smirnoff vodka, Johnnie Walker whisky and Guinness beer saw strong growth in Latin America, Africa and Asia which account for a third of group earnings, while demand in Europe and North America was still weak.

Chief executive Paul Walsh said the group had seen a strong performance in the first six months of 2010 and now expects higher growth this year than the 2% rise in underlying operating profit seen in the reported year to June 2010.

He added that the performance, “gives us confidence that in fiscal 2011 we well be able to improve on the organic operating profit growth we have delivered this year".

But analysts said the outlook was cautious with no share share buyback programme announced, the rise in the dividend very modest and the shares dipped 0.8% to 10.57 pounds to be the FTSE 100’s second biggest loser by 0745 GMT.

“We see Diageo’s organic EBIT growth of 2% as slightly disappointing versus its guidance of low single digit growth and our forecast of 3.4%," said analyst Matthew Webb at brokers JP Morgan Cazenove.

Diageo’s finance director Nick Rose admitted he was being cautious but was ready for any uptick in developed markets in 2011 with marketing spend set to rise above sales growth and as it sees input costs flat this year and well hedged on grain.

“We are a little cautious over our core developed markets in Europe and North America but we feel good about our International and Asia Pacific regions," he said.

The group posted pre-exceptional earnings up 13% at 72.0 pence a share for the year to end-June, compared with a consensus of 72.5p according to Thomson Reuters Starmine SmartEstimates, which predict future earnings by putting more weight on recent forecasts of top-rated analysts.

The final dividend rose 6% to 23.5 pence a share, and the group said it would now look to increase dividend payments by 6% rather than 5% previously.

The London-based group which makes Baileys liqueur, Captain Morgan rum and Tanqueray gin said operating profits rose 2% to 2.75 billion pounds in line with its target of a low single digit%age rise due to a strong second half rebound after first half July-Dec 2009 profits had fallen 3%.

Diageo’s arch-rival Pernod Ricard lifted its annual profit growth target last month for the second time in less than two months and now looks for a 3-4% rise due to improving trends in the US, Eastern Europe and duty free.. Pernod reports its full year results on 2 September.

Diageo shares have outperformed the FTSE 100 by 2% and Pernod by 6% this year, but have slipped back from 10.84 pounds at end-2009.

Pernod shares trade on a premium of 13.8 times forecast earnings for the year to June 2011 compared to Diageo on 13.5 as the French maker of Absolut vodka and Martell cognac has greater exposure to the Asia’s growing markets, especially China.