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Diageo: tariff impacts overshadow first half progress

Diageo’s first half sales and operating profit beat expectations. But uncertainty around global tariffs has prompted a withdrawal of medium-term guidance.
Diageo - first-half revenue and profits stumble

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Diageo’s first half sales of $10.9bn came in better than expected. That reflected organic growth of 1% with the positive impact of price and mix more than offsetting a small fall in volume.

Operating profit of $3.2bn was down 1.2% on an underlying basis, driven by an increase in overheads.

Free cash flow was up from $1.6bn to $1.7bn, as improved cash management more than offset an increase in investment spending. Net debt stood at $20bn.

The interim dividend was held flat at 40.5c per share.

Ignoring the impact of tariffs Diageo expects organic growth to accelerate in the second half and for margins to dip a little further. But “given the current macroeconomic and geopolitical uncertainty” in many key markets, medium-term guidance has been removed.

The shares fell 2.5% in early trading.

Our view

Diageo’s first half was better than expected and showed some tentative signs of a recovery. However, that wasn’t enough to calm investor concerns around the potential impact of global tariffs in the current geopolitical environment. The uncertainty has prompted the company to remove its medium-term guidance, and the market reacted negatively on the day.

The company’s shown some prowess at navigating tariffs in the past and for now potential US import taxes on Canadian whiskey and Mexican tequila have been put on hold. But there’s likely to be more twists and turns as Donald Trump settles back into the White House.

Diageo’s powerful brand portfolio which includes the likes of Guiness and Don Julio tequila is helping it to gain further share in most territories. On a long-term view we see the geographic diversity as a positive, but there are some regional headwinds currently impacting the business. Growth has flatlined in the US, Diageo’s biggest market as several years of strong price rises start to take their toll on consumers. Changing attitudes towards alcohol as well as the surging popularity of weight-loss drugs are also factors said to be weighing on demand but it’s a little too early to tell if these are trends that will stick.

In the Asia Pacific region, India is one emerging market where Diageo is doing well but that’s not been enough to offset weakness elsewhere. A cautious Chinese consumer environment and destocking by merchants at travel hubs have been called out as key challenges. That’s blunted the impact of strong growth in Africa and a robust recovery in Latin America.

Diageo's shift towards a more premium offering has served the group well in the past. Consumers willing to spend money on premium brands have tended to be more resilient to cost-of-living pressures. But with volumes beginning to stutter, we're seeing the rate of price hikes easing.

Against the backdrop of a murky growth outlook the shares offer a yield of 3.7%. This can’t be guaranteed, and with net debt currently sitting the wrong side of the company’s target range, the scope for dividend progression in the immediate future looks limited.

We see the group as fundamentally strong, with a world-class stable of brands to fall back on. But Diageo’s disappointing financial performance last year combined with concerns over tariffs has driven the valuation below the long-term average. That could prove an attractive entry point, but with plenty of uncertainty ahead investors should be prepared for more volatility.

Environmental, social and governance (ESG) risk

The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry-wide, especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry-wide risks, with other issues varying by sub-sector.

According to Sustainalytics, Diageo’s management of ESG risk is strong.

The group aims to achieve net zero emissions by 2050, or sooner, with Scope 1,2 & 3 emissions targets in place. Diageo has set water reduction targets and deadlines, however, it does not disclose its initiatives to achieve this and there is no external certification for its environmental management activities.

Diageo key facts

All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment.No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.
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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 4th February 2025