Diageo cuts guidance and dividend on tough US trading, shares slide

(Sharecast News) - Diageo cut its full-year guidance and halved the dividend on Wednesday, sending shares sharply lower, after weak trading in North America and China weighed heavily on the drinks giant. Posting interim numbers, the owner of Smirnoff, Guinness and Johnnie Walker, among others, said strong sales growth in Europe, Latin America and Africa had been more than offset by a weakening performance in North America. US spirits in particular had been hit by ongoing pressures on disposable income and stiff competition from cheaper alternatives.

Chinese white spirits also struggled in Asia Pacific.

Sales in North America - its biggest market - slid 6.8% in the six months to 31 December, while sales in Greater China plunged 42.3%.

As a result, group net sales shed 4% at $10.5bn during the period. On an organic basis, sales fell 2.8%, driven by a 0.9% decline in organic volumes and a negative price/mix of 1.9%. Adjusted operating profits before one-off items were 2.8% lower at $3.3bn.

The dividend was cut to 20 cents a share, from 40.5 cents. Diageo called it a "difficult decision" but insisted the reduction would "accelerate the strengthening of the balance sheet and create more financial flexibility".

The blue chip also cut its full-year outlook. It now expects organic net sales to fall by between 2% and 3% this year, primarily due to ongoing weakness in the US. It had previously forecast sales growth of flat to slightly down.

Organic operating profit growth was forecast to be in the range of flat to low-single digit.

It also set a minimum floor for the divided of 50 cents per annum. Last year the total dividend was 103.5 cents.

As at 1230 GMT, the stock had slumped 9% 1,709.63p.

Diageo has endured a difficult few years, including changing consumer habits, tariffs and an uncertain economic backdrop, which has affected demand for its premium products.

Wednesday's results were the first under newly-installed chief executive Dave Lewis, who joined at the start of the year. The former boss of Tesco, who has a long-held reputation for cost cutting, said: "Only several weeks in I can already see significant opportunities for Diageo to act more decisively to enhance its competitiveness and broaden the portfolio offering, leading to higher growth.

"To deliver on these opportunities, we need to create more financial flexibility. Accordingly, the board has taken the difficult decision to reduce the dividend to a more appropriate level.

"We are confident that this is the right action."

Dan Coatsworth, head of markets at AJ Bell, said: "Most of the key metrics are in negative territory, with sales, operating profit and cash flow all in decline.

"Shareholders have also been delivered the sucker punch of a big cut to the dividend. That might come as a surprise to many investors, who thought they would be paid to wait for the business recovery.

"These are awful results, and the repair job is massive."