Diageo plc (DGE) Ordinary 28 101/108p

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Diageo reported third-quarter organic sales of $4.4bn, up 5.9%. Growth was driven by a 3.1% increase in average selling prices while volumes rose 2.8%. All regions contributed positively, except for Europe which recorded a slight sales decline.

Changes so far to the global tariff regime are expected to bring around $150mn of additional costs. Around half of this is expected to be offset through streamlining operations, before any price hikes. Tariffs between the US and China do not have a material impact on the business.

Full-year organic sales are expected to increase, while full-year organic operating profits are expected to decline slightly. Next year, full-year organic profits are expected to grow ahead of organic net sales.

The shares rose 1.7% in early trading.

Our view

Diageo delivered solid sales growth in the third quarter, benefiting from higher prices and volumes. Although customers stocking up before higher tariffs kicked in flattered sales figures, the big picture is that full-year guidance remains on track and there are early signs that the industry’s recovering from its cyclical hangover.

Diageo has a world-class cocktail of brands, including Guinness, Smirnoff, Johnny Walker, and Tanqueray. The ongoing consumer shift towards these more premium brands is helping average selling prices rise across all regions except Asia Pacific. If the group can keep a lid on costs, it should benefit from this premiumisation trend, and profit growth is likely to pick up ahead of sales growth.

The Latin American and Caribbean (LAC) region was a major pain point last year. Sluggish demand led to a sharp drop in sales and a group-wide profit warning. Performance has since improved, and the region is now benefitting from some easy comparable figures.

The company’s shown some prowess at navigating tariffs in the past. The current tariff regime is set to bring around $150mn of additional costs annually, or around 2.5% of last year’s underlying operating profits (2024: $6.0bn). Diageo’s hoping to offset around half of this through streamlining operations and will likely lean on price hikes to help offset the rest. But this will take some time to enact, and the picture on tariffs can change quickly.

We should point out that while demand is holding up well now, tariffs have the potential to cause a global economic slowdown. If that happens, consumers will have less cash in their pocket, and are unlikely to spend much of their tight budget on the discretionary drinks that Diageo sells.

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.

The shares offer a prospective dividend yield of 3.6%. This can’t be guaranteed though, 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 to be patient and expect more volatility along the way.

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.

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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