johnnie walker

Analysis: Diageo's recovery mode in 2021

01 June, 2021

Diageo shareholders were toasting chief executive Ivan Menezes after he said they can expect to receive billions of pounds in share buybacks or special dividends. The Smirnoff, Johnnie Walker and Guinness producer announced that organic profit should grow by at least 14% in the year to 30 June.

That represents a significant improvement upon previous growth forecasts. Diageo shares have increased 6% since the announcement. Menezes decided to freeze the firm’s return-of-capital scheme last year due to the Covid-19 pandemic. At the time, Diageo had returned £1.25bn to investors out of a long-term plan to return £4.5bn.

The company has now announced that payments will be resumed. Shareholders can expect £1bn in payments by the end of the 2022 financial year, with £500m in share buybacks to be completed by November 2021. 

It follows a strong performance in North America – the company’s largest market – along with buoyant off- trade sales in Europe, and recovery in Africa, Asia Pacific, Latin America and the Caribbean.

“I am very pleased with how our business is recovering in fiscal 21 [12 months to 30 June 2021], our strong competitive performance across key markets and our robust cash generation,” said Menezes.

“Our disciplined approach to capital allocation is unchanged. Our priority remains to invest in the business to deliver sustainable and efficient organic growth and to pursue acquisitions that further strengthen our exposure to attractive categories.

“When we have excess cash, we have been clear that we will seek to return it to shareholders,” said Menezes. 

He added that the firm’s decision to resume its return of capital programme reflects Diageo’s improved performance in the final six months of 2020, the “continued strong recovery of our business” and growing confidence that it will hit its ambitious revenue targets by the middle of 2022.

“We are confident that Diageo will continue to execute effectively in this challenging environment and will emerge stronger,” said Menezes.

The initial plan was to return the £4.5bn to investors by June 2022, but that has now been pushed back to June 2024 due to the pandemic. Yet investors should be feeling upbeat about their holdings, and Diageo has now received a consensus rating of “buy” from analysts, with a higher consensus price target.

It follows a blowout first quarter of  fiscal 21 from the likes of AB InBev, Pernod Ricard, Heineken, Rémy Cointreau and Campari Group. Bullish sentiment now abounds, and brand owners are preparing to strike while the iron is hot.

A new report suggests advertising spend from alcohol brands will increase from $6.7bn to $7.7bn by 2023. Zenith forecasts Spain, the UK, Germany and France to be the standout growth markets, with annual growth rates between 2020 and 2023 of 28%, 21%, 10% and 8% respectively. These markets saw a significant decline in ad spend during 2020, due to the coronavirus lockdowns, but Zenith said a “rapid recovery” should lead them back to pre-pandemic levels by 2023.

The report focuses on Australia, Canada, China, France, Germany, India, Italy, Russia, Spain, Switzerland, the UK and the US, which between them account for 73% of total global ad spend.

“The alcohol industry has suffered more from the pandemic than most, and that was reflected in the steep drop in ad spend last year,” said Jonathan Barnard, head of forecasting at Zenith. “The recovery won’t be as dramatic as the downturn, but investment in digital communication will drive steady growth in alcohol advertising for the next few years.”

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