It’s traditionally seen as one of those safety-net shares investors can dash to in times of economic strife, but that’s not how things have played out for Diageo over the past 12 months.
Its global presence, diversity of its brands and historical resilience of its revenue streams have failed to prevent the drinks group from being snared by some of the setbacks of coronavirus.
While many of us have turned more frequently to the drinks cabinet at home during lockdown, the closure of the travel and hospitality sectors has had an obvious negative impact on Diageo’s sales.
Although there are reasons to be optimistic about some of the group’s brands and markets, particularly in North America, the shares remain below their level of a year ago.
Created in 1997 through the combination of Guinness and Grand Metropolitan, Diageo is the world’s largest drinks group, selling more than 200 branded spirits and liqueurs in 180 countries and employing 30,000 staff. Its best-known drinks include Gordon’s gin, Johnnie Walker whisky and Captain Morgan’s rum and it also produces Bailey’s, the liqueur.
Before Covid, Diageo was generating mid-single-digit growth in sales and double-digit increases in pre-tax profit, far better than might be expected for a mature company whose fortunes are linked to the economies in which it operates.
Its biggest market, in North America, accounted for just over a third of sales, but the group was making strong inroads in the less developed regions of Latin America, the Caribbean and Africa.
As well as aiming to grow organic net sales by between 4 per cent and 6 per cent a year, and operating profits by a respective touch more, the company also planned to return £4.5 billion of capital to shareholders in the three years to the end of 2022.
But Diageo was quick to feel the effects of early restrictions in China and Asia, warning almost exactly a year ago that they could cut sales for last year by up to £325 million and operating profit by as much £200 million. Shortly afterwards, it withdrew its earnings guidance, something that it has yet to reinstate.
When they came, annual sales and profit for the year to June were sharply lower, accompanied by a £1.3 billion impairment hit directly linked to Covid-19.
At the same time, the drinks company still paid a final dividend, albeit having paused the capital return, and shored up its finances through an accelerated $2 billion debt issue and a higher credit facility.
Since then, the picture has substantially improved. Diageo returned to growth over the six months to the end of December, with organic sales up by 1 per cent and a much better performance than expected in North America, where it gained market share, particularly with take-home sales.
While operating profit continued to be affected, Diageo’s cost efficiencies showed through in cash generation that was £710 million higher at almost £2 billion.
The relaxing of further restrictions over the coming months should benefit the company, which will be comparing itself with weak previous periods.
Earnings this year will still be held back, but analysts are growing in confidence about the outlook for next year. Bernstein, for example, is looking for profit before interest and taxes of almost £4.3 billion in the company’s financial year to the end of June 2022 on revenue of £13 billion. That is comfortably above pre-Covid levels.
The shares, down 0.2 per cent at £29.40, change hands for 23.6 times Jefferies’ forecast earnings for a dividend yield of 2.5 per cent. They are beginning to look safe again.
ADVICE Hold
WHY As markets reopen sales will return to pre-Covid levels and more reliable growth will resume
IntegraFin
IntegraFin doesn’t attract anything like as much attention as peers such as Hargreaves Lansdown and AJ Bell, but that hasn’t stopped the funds platform thriving.
Its lower profile is probably down to the fact that the company doesn’t sell to the public but to financial advisers. The idea is that IFAs can buy all they need through its Transact platform, rather than having to shop around via numerous investment managers.
IntegraFin was set up in 1999 by Michael Howard, 62, an Australian who initially operated in a flat above a restaurant in east London. Howard, who until October 2017 was executive chairman, also set up Object Mastery, which provides technology for the Transact system, although he left in 2016.
Transact has 8,000 funds, many more than either Hargreaves Lansdown or AJ Bell, and it also provides help with financial planning and record-keeping.
Having listed for 196p a share in March 2018 with just under £30 billion in funds under its scope, growth has come at a healthy clip: IntegraFin now oversees almost £45 billion of assets.
Late last year, the company considered a takeover bid for Nucleus, a similar business based in Edinburgh that also listed in 2018 and is valued at about £144 million. It dropped its interest in January but went on to buy a specialist software provider, Time for Advice.
There is much to like about IntegraFin, whose model is locked into the long-term increase in saving and investing. While the number of IFAs is shrinking through consolidation, the evidence is clear that the amount of capital passing through them is not.
Over the year to the end of September, the overall market that IntegraFin competes in grew by 6 per cent to £460.52 billion, so there is plenty to play for. At 51.5 per cent, the company’s operating margin is attractively high.
The shares were down ¾p or 0.1 per cent to 502¼p yesterday, but they have risen by more than 150 per cent since the float. They are valued at 24.8 times Numis’s forecast earnings for a dividend yield of 2.5 per cent. That looks like reasonable value and makes them a respectable hold.
ADVICE Hold
WHY Solid growth and more to come but not cheap
