Diageo’s tumbler has been half-empty for quite some time. The Smirnoff and Guinness maker, once a growth machine, has looked sluggish for the duration of chief executive Ivan Menezes’ three-year reign.
Now, at last, there are signs the good times are rolling again at the world’s biggest spirits producer. Time to break out the Captain Morgan and Johnnie Walker, perhaps.
That sentiment will doubtless be shared by investors. Diageo has been among the biggest winners in the post-referendum flight to safe-haven consumer goods stocks. It has also been boosted by the slump in the pound against the dollar; the US is Diageo’s biggest market. Its shares closed on Friday at £21.07, close to an all-time high.
Beneath the Brexit bump, though, Diageo is starting to tick. Its full-year results on Thursday will reveal a telegraphed fall in sales and profit, but the momentum through the second half of the year is strong, especially in North America, where the distiller makes almost half its profits. Analysts at Morgan Stanley expect sales growth in the region to be 8.3% in the six months to the end of June.
Menezes has made fixing America his top priority. He sent former finance director Deirdre Mahlan to the US last year and has spent big on building Bulleit, a bourbon whiskey brand.
Investors could be forgiven for thinking they’ve heard it all before. Menezes’ tenure has been littered with promises that recovery in the US — and the entire business — is around the corner.
Yet this time fate is smiling on Diageo and its chief executive — and it could get even better from here. Analysts at the broker Redburn expect a £90m boost from favourable currency movements next year.
For sure, Diageo is not cheap. It will finish its financial year with a price to earnings ratio of 24.5, Redburn estimates.
That’s an eye-watering valuation, but with the gathering economic gloom and a forecast dividend yield of 3% or more in the next three years, Diageo looks a pretty good bet. Buy.
Danny Fortson is away
