Diageo share price nears record: what to expect from earnings

While not cheap, Diageo shares combine a strong fundamental performance and healthy dividend with an attractive price chart for those looking to capture further gains in the share price.

Diageo Source: Bloomberg

When are Diageo’s full-year earnings?

Diageo reports full-year (FY) earnings on 25 July, covering its financial year to 30 June 2019.

Diageo earnings – what does the City expect?

Diageo is expected to report pre-tax profit of £4.13 billion, up from £3.87 billion a year earlier. Meanwhile, revenue is expected to be £12.78 billion, an increase over the previous year’s £12.16 billion.

Diageo’s success in recent years has been built on expansion in the premium drinks market. While younger drinkers may not consume as much as their parents, they have sought out more expensive drinks, with the rise of craft beer and premium gins a key element of this trend. Rising sales at Diageo have been driven by a mix of organic growth and acquisitions, but the organic element has been the key. Indeed, growth has sped up over the past two years, rising 4.3% in 2017, 5% in 2018 and then 7.5% for the first half (H1) of this financial year.

It continues to possess commanding market shares in developed markets, at 34% in North America, 24.2% in Europe and 20% in the Asia Pacific. By contrast, it has just 8% of sales in Latin America and 12.3% in Africa. But rising wealth in these last two areas will help to drive expansion, as consumers trade up to newer brands that are available at higher prices.

Unfortunately for Diageo, this growth is not available at a bargain price. The forward price-to-earnings (P/E) ratio is currently 24.6, the highest level in over five years and more than one standard deviation higher than the five-year average of 20.4. Dips below this average are rare, but have provided compelling buying opportunities. But in a world of low bond yields, Diageo’s solid record is hard to beat. The current dividend yield of 1.9% is not particularly high, but it is well covered, at 1.86 times earnings, and a solid operating margin of 30% and 18.8% return on capital employed (ROCE) shows that the firm is able to make its investments work in a world of slowing developed market growth.

Since 2000, Diageo has returned 921% to investors, when dividends are included. This equates to an annualised equalised return of 13%.

How to trade Diageo’s earnings

Diageo’s shares are covered by 30 analysts, of which twelve have ‘buy’ recommendations, while thirteen are ‘holds’ and five are ‘sell’ ratings. The current target price is £33.59, 2% below Diageo’s current price of £34.54.

The average move on results day is 2.5%, but current options pricing implies a move of 2.72%, slightly more volatile than is usual for a Diageo results day.

Diageo share price: technical analysis

The rally in Diageo shares has continued so far in 2019. While the FTSE 100 is up 12% (excluding dividends), Diageo is 23% higher (excluding dividends). Since the end of January, the shares have remained solidly above their 50-day moving average (MA), with this indicator doing an excellent job denoting the near-term trend. Minor dips in late February and mid-April were treated as buying opportunities.

Slow, steady gains are the order of the day here, and have been throughout 2019 so far. Interestingly, the shares spent much of 2018 consolidating, recovering from a sharp fall in the first quarter before beginning to push steadily higher from October.

At present a move below £33.50 is needed to suggest some near-term weakness that could see Diageo endure its first serious pullback of the year.

Diageo price chart

Diageo price chart

Source: ProRealTime

Little to dislike about Diageo

It is hard to find things to dislike about Diageo, either on a fundamental or technical basis. Strong growth, a healthy dividend and excellent operating margins have been married to a very strong price chart, with steady gains over the course of the year enhancing a very strong long-term trend. Perhaps some might quibble over the relatively high forward PE ratio, but here is an example of where investors will have to pay for a quality company.


This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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