Diageo shares surge after announcing improved profit forecast

Diageo stock increased by 4% this morning after it announced an improved profit growth forecast for the 2021 fiscal year.

The Smirnoff, Johnnie Walker and Guinness producer now expects organic profit to grow by at least 14% in the year to June 30, 2021.

The drinks giant informed shareholders to expect billions of pounds in share buybacks or special dividends as a result of the improved outlook.

Chief executive Ivan 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 £1.25 billion to investors out of a long-term plan to return £4.5 billion.

The company has now announced that payments will be resumed. Shareholders can expect £1 billion of payments by the end of the 2022 financial year, with £500 million 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 and Latin America and the Caribbean.

Menezes said: “I am very pleased with how our business is recovering in fiscal 21, our strong competitive performance across key markets and our robust cash generation.

“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.

“The board’s decision to resume our return of capital programme at this time reflects Diageo’s improved performance in the first half of fiscal 21, the continued strong recovery of our business, and our expectation that we will be back within the top end of our target leverage ratio1 of 2.5-3.0x at June 30, 2022, post completion of the second phase of the return of capital programme.

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

The initial plan was to return the £4.5 billion to investors by June 2022, but that has now been pushed back to June 2024.