Earnings: why the Diageo share price is falling today

Diageo’s share price lost ground when the market opened this morning, falling 5% after the company announced interim results.

As I write, the stock is trading at 3,462p. That means shares in the drinks maker are also down 5% over the last 12 months. Should investors count on the stock now, or is it likely to drop?

Investor updates

In today’s update, Diageo reported net sales of £9.4bn for the six months to 31 December. This is an 18% year-over-year increase, reflecting strong organic sales growth as well as the positive impact of the strong US dollar.

Excluding foreign exchange benefits, net sales increased 9.4%, with growth in all geographic areas. This was ahead of analysts’ forecasts of 7.9% growth. Management favors strong growth in the scotch, tequila and beer categories.

The company’s operating profit rose 15.2% to £3.2bn, although operating margins fell by 92 basis points. However, the ability to increase prices and implement supply productivity savings offset the impact of cost inflation on gross margins.

This pricing power is one of Diageo’s key competitive advantages. This allows the company to maintain its profitability over time.

However, the company’s free cash flow was affected during the period. And the company’s sales in North America slowed, growing just 3% on an organic basis. This missed analysts’ expectations and may explain the current drop in share prices.

Management remains cautious about the second half of fiscal 2023, highlighting a challenging operating environment.

Another acquisition

Earlier this month, the company announced it had reached an agreement to acquire it Don Papa, a super premium rum brand from the Philippines. The upfront cost is €260m, with a potential consideration of up to €177m until 2028, depending on performance.

Today’s companies make a lot of money through luxury drinks such as these, because they have superior profits. These premium-plus brands accounted for 57% of net sales and drove 65% of organic net sales growth in the last six months of 2022.

The spirit giant also announced that he had earned it Mr. Black, Australia’s leading premium-regional coffee liqueur. Meanwhile, it was thrown from Archer brand.

Diageo is a dividend aristocrat, has maintained a track record of increasing annual payouts since it was created 25 years ago. And the company increased its interim dividend by 5%, to 30.83p per share. Dividend income from the shares of PT.

What I am doing now

As a long-term investor, one earnings release cannot affect me one way or the other. But I am encouraged by the continued growth of the business. Chief executive Ivan Menezes confirmed that Diageo is 36% bigger than before the pandemic.

However, the stock is also trading at a premium, even after today’s haircut. It has a price-to-earnings ratio (P/E) of 25. So I will continue to hold my shares for now.

If the share price is going to drop in the coming weeks, I will happily add to my holdings.