The Diageo share price lost its fizz when markets opened this morning, falling 5% after the company announced its interim results.
As I write, the stock is trading at 3,462p. That means shares in the drinks maker are also down 5% over the last 12 months. Should investors be scooping up the stock today, or could it have further to fall?
Investor update
In today’s update, Diageo reported net sales of £9.4bn during the six months to 31 December. That was an increase of 18% year on year, reflecting both strong organic sales growth as well as favourable impacts from a strong US dollar.
Without foreign exchange benefits, net sales grew 9.4%, with growth in all geographic regions. This was ahead of analyst forecasts of 7.9% growth. Management singled out strong growth across its scotch, tequila and beer categories.
The company’s operating profit grew 15.2% to £3.2bn, though its operating margin declined by 92 basis points. However, its ability to increase prices and carry out supply productivity savings offset the impact of cost inflation on its gross margin.
This pricing power is one of Diageo’s major competitive advantages. It enables the firm to preserve its profit margin over time.
However, the company’s free cash flow did take a hit during the period. And the firm’s North American sales slowed, rising just 3% on an organic basis. This missed analysts’ expectations and probably explains the falling share price today.
Management remains cautious regarding the second half of fiscal 2023, highlighting a challenging operating environment.
More acquisitions
Earlier this month, the company announced it had reached an agreement to acquire Don Papa, a super-premium rum brand from the Philippines. The upfront cost is €260m, with a further potential consideration of up to €177m through to 2028, subject to performance.
The company now makes a lot of its profit through luxury drinks such as this, as they have superior margins. These premium-plus brands contributed 57% of net sales and drove 65% of organic net sales growth across the last six months of 2022.
The spirits giant also announced it had acquired Mr Black, a leading Australian premium-priced coffee liqueur. Meanwhile, it disposed of the Archers brand.
Diageo is a dividend aristocrat, having maintained its track record of increasing annual payouts since it was created 25 years ago. And the company increased its interim dividend by 5%, to 30.83p per share. The stock has a dividend yield of 2.1%.
What I’m doing now
As a long-term investor, one earnings release is unlikely to influence me one way or the other. But I’m encouraged by the continuing growth of the business. Chief executive Ivan Menezes pointed out that Diageo is 36% larger than it was prior to the pandemic.
However, the stock is also trading at a bit of a premium, even after today’s haircut. It has a price-to-earnings (P/E) ratio of 25. So I’m going to keep holding my shares for now.
If the share price were to take a major tumble over the coming weeks, I’d happily top up my holding.
