Diageo shares tumble 12% as new boss Dave Lewis attempts to turn around Scotch whisky giant
“New CEO Dave Lewis faces a baptism of fire, prioritising debt reduction over pay-outs, eroding Diageo’s dividend allure” – Adam Vettese, analyst
Johnnie Walker and Talisker owner Diageo has cut its outlook once again and slashed its shareholder payout as new boss Sir Dave Lewis stressed that the spirits giant needed to “act more decisively” to boost its flagging performance.
The former Tesco chief executive - who took on the top role at Diageo at the start of the year - said there was “significant work ahead” in turning Diageo around as the group reported a 2.8 per cent drop in underlying operating profits to $3.26 billion (£2.4bn) for the six months to December 31, as underlying sales also fell 2.8 per cent.
The group, which has almost 30 malt distilleries in Scotland and owns global brands such as Guinness stout, Smirnoff vodka and Captain Morgan rum, downgraded its full-year guidance for the second time in three months, with sales now expected to fall by 2 per cent to 3 per cent because of ongoing sales troubles in the US and earnings predicted to be flat to a low-single-digit rise.
The firm is ramping up cost savings and now expects around 50 per cent of its cuts in the current financial year. In a blow to investors, Diageo said it was more than halving its interim dividend. Shares were down by as much as 12 per cent in afternoon trading on Wednesday.
Lewis is working on an updated strategy for the group, which will be unveiled later in the summer.
He 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 which will accelerate the strengthening of our balance sheet.
“We are confident that this is the right action which will ensure that Diageo can reinforce its position as the leading international spirits business and drive stronger shareholder value over the coming years.”
Adam Vettese, market analyst for eToro, said: “Diageo’s interim results make for grim reading, with a halved dividend and slashed full-year guidance underscoring deep US weakness and China headwinds.
“New CEO Dave Lewis faces a baptism of fire, prioritising debt reduction over pay-outs, eroding Diageo’s dividend allure. Shares are now trading at half the price they were three years ago.
“Some investors may be tempted seeing that the shares look cheap versus history, especially if US rebounds, but repeated downgrades signal execution risks in a tough macro environment.”
Dan Coatsworth, head of markets at investment platform AJ Bell, added: “Lewis has only been in the top job for a matter of weeks and it’s too early for him to formulate a proper plan.
“For now, investors will have to put faith in his ability to sort things out. Dave Lewis will be under pressure to fix Diageo fast, yet he’s more likely to say, ‘good things come to those who wait’.”
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