Drinks giant Diageo (LSE: DGE) (NYSE: DEO.US), with its huge array of worldwide drinks brands (including that global leader Johnnie Walker), used to be a byword for steady profit growth. It always did well when markets were buoyant, but also had some defensive strengths in downturns.
In fact, through most of the recession Diageo kept its earnings per share (EPS) growing — for the year ended June 2013 we saw a very acceptable 9% rise to 103p per share.
Falling earnings
But we saw a 7% EPS fall for the year just ended in June 2014, to 95.5p, and we’ve since been seeing forecasts for June 2015 being pared back by the City’s analysts.
Six months ago the great and the good were suggesting EPS of 107p for this year, which would have provided a rise of 12%. That would have reversed last year’s drop and even taken Diageo’s earnings back above 2013’s high point.
But the latest consensus for just 95.6p is barely a tenth of a percent up on 2013’s figure, and nowhere near recapturing the high ground again. But at least the slide might have been halted, as today’s forecast is actually slightly up on a week ago — and Diageo does have a habit of beating expectations.
Dividend yields dropping
Meanwhile, what about Diageo’s dividends? Back in 2010 Diageo was yielding 3.6%, and though the annual handout has risen every year since in cash terms, the yield has been dropping due to a rising share price — it’s up 76% since June 2010, dropping the 2014 yield to just 2.8%.
And dividend forecasts are falling back a little too, having been slimmed down from 55.5p six months ago to 54.5p today, which would yield 2.9% on today’s share price of 1,885p.
So why the negativity?
Like many, the strengthening of Sterling has been hurting Diageo’s expected bottom line reported in pounds, but some of its key markets have been struggling too. China in particular has been hit by slowing growth, and there’s a growing culture of anti-extravagance being pursued by the government at the moment, so that’s hurting.
What will 2016 bring?
We don’t have any forecasts for 2016 yet, but when we do get them I wouldn’t be surprised if we see another modest year on the cards. But that could extend a buying opportunity for what is still a quality long-term company.
