Diageo tipped to report strong sales momentum but cost spikes threaten a hangover

Global drinks giant Diageo, behind brands including Johnnie Walker and Guinness, will this week reveal whether the return of big-spending drinkers to bars and restaurants has outweighed the impact of rising costs.

Diageo is expected to report a sales boost from increasing demand for premium spirits.

Although Scotland’s largest distiller is expected to report continuing strong sales momentum and a shift to premium drinks as lockdown measures ease across the world, analysts are keen to see whether price spikes in the supply chain are taking their toll when it reports first-half figures.

Matt Britzman, equity analyst at Hargreaves Lansdown, said management had warned of near-term volatility in the previous full-year results.

“With inflationary pressures pushing costs up, we’ll be looking out for any impact on operating margins,” he said.

The company, which also owns brands such as Bell’s and Talisker, is expected to post an 8 per cent increase in headline pre-tax profits to £2.4 billion for the first half of its financial year.

Analysts have pencilled in sales growth of 11 per cent for the period, taking the figure to £7.7bn, and with international air travel bouncing back there could also be a positive update on duty free sales performance.

However, Britzman said the group’s price earnings ratio means investors are “expecting good things and any major deviation from guidance risks disappointing the markets”.

The strong recovery the group has seen as lockdown measures have eased across its global markets has helped its share price surge by almost 30 per cent over the past year.

Although cost hikes are a concern, AJ Bell investment director Russ Mould said the company’s brands may offer it some protection against inflation thanks to their pricing power.

However, he noted the shares have dipped a little of late which may reflect the threat of higher interest rates and a “potential shift in market sentiment away from reliable, consistent companies like Diageo, whose shares carry a premium valuation, and toward cyclical recovery plays”.

Mould said the group’s comments on returns to shareholders will also be in focus.

“It raised its dividend by 4 per cent last year, to extend an annual growth streak that began in 1999, and analysts have pencilled in a 5 per cent increase for this financial year that ends in June. That growth rate provides a benchmark for the first half, when Diageo paid 27.96p a share last year,” he pointed out.

Diageo is also running a share buyback programme, returning £4.5bn to shareholders by 2024. It had bought back £1.5bn by January 2020 but then halted the scheme as the pandemic hit home. It revived the plan in early 2021, buying back £450m worth of shares and then launching the next leg, with a plan to buy a further £550m between November of last year and March of this year.

“Analysts will no doubt look for any indication of how the remaining £2bn will be spread across 2022, 2023 and 2024 and to chief executive Ivan Menezes for any financial guidance for the rest of the year to June,” said Mould.

The group, which is behind the recently opened Johnnie Walker attraction on Edinburgh’s Princes Street, told investors at its AGM that it was “managing” inflationary pressures.

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