The Johnnie Walker-to-Guinness drinks giant, which also makes Smirnoff vodka and Baileys, said it now expects full-year earnings growth of at least 14 per cent as sales have staged a further recovery since its first half.
Diageo said that, thanks to the strong performance, it will resume the plan to return cash to shareholders that was paused in April last year at the height of the coronavirus crisis.
It will launch the second phase of the programme with £1bn of payments by the end of 2021-22, starting with £500 million in share buybacks due by mid-November.
The move comes as part of a wider long-term aim, initially launched in 2019, to return up to £4.5bn to investors, but the timescale has been extended by two years to June 30, 2024.
Chief executive Ivan Menezes said he is "very pleased” with how the business is recovering. He added: "When we have excess cash, we have been clear that we will seek to return it to shareholders. The board's decision to resume our return of capital programme at this time reflects Diageo's improved performance in the first half of 2020-21."
The group revealed that trading has been "particularly strong" in North America, its largest market. Europe has seen solid off-licence sales and a boost from hospitality beginning to reopen as lockdowns lift in some countries, such as the UK.
But its significant travel division remains under pressure due to ongoing air travel restrictions. Diageo's half-year results show that pre-tax profits fell 8.3 per cent to £2.2bn in the six months to the end of 2020, with net sales down 4.5 per cent at £6.9bn.
Sales in Diageo's travel retail Europe division dropped 72 per cent during the period, while pub, cafe and restaurant closures hit on-trade business.However, the group returned to so-called organic net sales growth in the first half.
William Ryder, equity analyst at Hargreaves Lansdown, said: “Diageo is feeling confident enough to restart its capital return programme as a broad recovery looks set to push underlying operating profit up at least 14 per cent.
"On the one hand, this is good news for investors, because further share buybacks will mean each remaining shareholder owns a slightly larger slice of the pie. But on the other, there’s a reasonable case for keeping buybacks on ice a little longer. Debt is still higher than is ideal.
"Diageo is a strong business with excellent brands, so while the valuation is relatively high, it’s not ridiculous. However, together, debt and valuation make a reasonable case for delaying further buybacks a little longer.”
The group last year hired Barbara Smith to lead the Johnnie Walker Princes Street visitor experience in Edinburgh and the company’s network of 14 distillery “brand homes” in Scotland. In January 2020 it pointed to “encouraging” signs as sales rebounded in key global markets where Covid restrictions have eased or been less onerous.
Rival drinks giant Pernod Ricard, which owns Chivas Brothers, last month posted sales of about £1.6bn for the three months to the end of March, up 19.1 per cent on the year before on an organic basis and ahead of forecasts.