Diageo plc (DGE) Ordinary 28 101/108p

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Diageo reported full-year organic sales growth of 1.7% (1.4% expected) to $20.2bn. The uplift was split between both price and volume growth, with performance weighted to the second half.

Underlying operating profit declined by 0.7% (-1.2% expected) to $5.7bn. The decline was driven by increased investment in its facilities, which more than offset the top line growth.

Free cash flow rose by $0.1bn to $2.7bn. Net debt rose from $21.0bn to $21.9bn.

Full-year organic net sales growth is expected to be similar to last year (2025: 1.7%), weighted to the second half. Underlying operating profits are set to grow at a faster mid-single-digit pace, helped by cost cuts.

A final dividend of 62.98 cents per share was announced, in line with the prior year.

The shares rose 6.3% in early trading.

Our view

Diageo’s full-year results managed to stumble past analysts’ conservative forecasts, despite a weak underlying alcohol market. Challenges are likely to remain for the year ahead, but profits look set to reaccelerate as cost cuts ramp up.

After more than two years of relatively underwhelming performance, former CEO Debra Crew stepped down with immediate effect in mid-July. The hunt for a new leader is ongoing, and until the position is filled, investor sentiment is likely to remain subdued.

Diageo is a giant in the alcohol world, with 13 billion-dollar brands on its shelves. Its world-class stable of spirit brands includes the likes of Smirnoff, Johnnie Walker and Tanqueray. In beer, Guinness remains a stout performer, recording yet another year of double-digit revenue growth.

The past few years have seen a trend towards more premium brands, which has helped to prop up margins in the past. That trend appears to be slowing in most regions, and alongside a soft underlying market, the outlook for sales growth looks muted in the near term.

Tariffs are another issue, and look set to add around $200mn of extra costs annually, or around 3.5% of last year’s underlying operating profits. To help offset this, Diageo’s looking to streamline operations elsewhere in the business, hoping to find a total of $625mn of cost savings over the next three years. Half of this will fall to the bottom line to improve profitability, while the other half’s set to be invested back into the business to drive future growth.

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.

The shares offer a prospective dividend yield of 4.4%. This can’t be guaranteed though, and with net debt currently sitting on 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 a subdued alcohol market, 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, including a CEO vacancy to fill, 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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