Diageo cuts growth target as earnings rise
Diageo, the world's biggest alcoholic drinks group, met forecasts on Thursday with an 11 percent rise in annual earnings, but cut its profit growth target due to the economic slowdown and rising input costs.
Diageo spirits up after earnings riseThe London-based maker of Johnnie Walker whisky, Smirnoff vodka and Guinness beer reported underlying earnings per share of 60.6 pence for the year to June 30, compared with a consensus forecast of 60.3p and a range of 59.5-61p in a Reuters poll.
But the group, which also makes Captain Morgan rum, Baileys liqueur and Gordon's gin, said weakening economies, especially in Europe, prompted it to cut its operating profit growth target for the year to June 2009 to between 7 and 9 percent from 9 percent.
Finance Director Nick Rose said the main economic concerns centred on Europe rather than North America, while he forecast accelerating cost increases this year from the rising price of grains, glass and packaging.
"Our view is robust around North America. Attention is switching to Great Britain and the rest of Europe, which is looking quite challenging," he said on a conference call.
Diageo shares dipped 0.6 percent to 974 pence by 8:35 a.m. after a recent rally linked largely to the recovering dollar, as nearly 40 percent of Diageo's profit comes from the U.S.
Analyst Matthew Webb at Cazenove said the results and the cut in growth target were expected, but he considered the shares overvalued as they trade at a 10 percent premium to rival Pernod Ricard.
The shares have outperformed the market and the alcoholic beverage sector in the recent market turmoil, outpacing the FTSE 100 index by 7 percent and the DJ Food and Beverages index by 3 percent since the start of the year.
CHALLENGING GLOBAL ECONOMIC TRENDS
"We enter the new financial year facing slowing global GDP growth and more challenging global economic trends, but ... we believe we can deliver organic operating profits growth for the coming year within our range of 7 to 9 percent," said Chief Executive Paul Walsh in a results statement.
He added that with the positive impact of exchange rates on its results and its share buyback programme he expected to deliver double-digit percentage earnings growth this year.
The group cut its share buyback programme to 750 million pounds in the current year from 1 billion pounds to reflect the near 600 million pounds it spent last year on acquisitions.
The weakness of the pound and recent strength of the dollar will mean the group will benefit from currency effects to the tune of 60 million pounds this year after a loss on translation of 5 million pounds in the year to June 2008.
Diageo's Rose said input costs such as oil, grains, glass and packaging rose 90 million pounds, or 3 percent of its cost base in the reported year, and he expected a bigger increase of 150 million pounds or 5 percent of its costs in the coming year.
The group raised its full-year dividend 5 percent to 34.35p.
(Reporting by David Jones, editing by Will Waterman)
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