RBC drops Diageo to 'sector perform', lowers target price

Analysts at RBC Capital Markets downgraded drinks maker Diageo from 'outperform' to 'sector perform' on Monday, stating it was no longer "appropriate" to assume the firm's margins would grow faster than other consumer staples companies'.

RBC said in common with the rest of the European consumer staples sector, it assumes that the cost to compete for Diageo will increase as it spends to boost resilience in case of future shocks once it recovers from the coronavirus pandemic.

"We expect them to spend quite a lot of time thinking about the best ways to safeguard the resilience of their businesses," said RBC.

The Canadian broker said that was going to necessitate additional expenditure to ensure that operations incorporate "more deliberate duplication and redundancy than has been the case".

"We expect Diageo to be as caught up in this trend as anyone else," added RBC, which also lowered its target price for the firm's shares to 2,400.0p from 3,000.0p.

The analysts also said that they now expect the group's underlying earnings margin will decline by ten basis points per year from 2023-2030, the same as for other stocks in its coverage.