Diageo FY operating profits up on forex, organic growth

Drinks company Diageo served up a strong shot of revenue and earnings growth for the year to 30 June, beating expectations as it was boosted by favourable exchange rates and accelerated organic growth.

With full year operating profit up 25% to £3.6bn as reported net sales increased 15% to £12.1bn, the FTSE 100 company said it would be returning £1.5bn to shareholders in 2018 through a share buyback.

All regions contributed to broad based organic net sales growth, up 4.3%, and organic volume grew 1.1%, Diageo said in a statement.

Free cash flow increased £566m to £2.7bn, way ahead of the £2.2bn consensus, boosted by a £204m working capital inflow, and saw net cash from operating activities up £584m to £3.1bn.

Basic earnings per share rose 18% to 106p. The final dividend was lifted by 5%, bringing the full year dividend to 62.2p a share.

Diageo said it continued to expect mid-single digit organic net sales growth and raised its margin improvement objective to 175 basis points from 100 over the three years to June 30, 2019.

It also forecast that the exchange rate movement for the 2018 financial year would adversely impact net sales by about £80m and favourably impact operating profit by around £70m.

Shares in Diageo bubbled up 7% to new highs on Thursday, setting an all-time intraday high above 2,450p, just after midday.

Analysts at RBC Capital Markets said the "interesting part" was the increase in three year margin guidance to 2019 on the back of an increased cost saving goal of £700m from £500m and the announcement of the share buyback.

Shore Capital expected the investor focus to be on two main areas operationally: "the US where growth in the North America division was +3%, maybe slightly below expectations with vodka notably week especially in Ciroc and Ketel One.

"Understanding the regulatory outlook for India is also going to be scrutinised, in our view. FX guidance is slightly positive for profit to add to the additional margin guidance. India within the Asia Pacific division is the unknown operationally from a forecast outlook perspective.

ShoreCap did not expect much change operationally to consensus elsewhere at this stage, apart from the effect of the buy-back on EPS.