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UPDATE 2-Britain's Diageo shares jump on higher margin target, buyback plan
July 27, 2017 / 7:22 AM / 4 months ago

UPDATE 2-Britain's Diageo shares jump on higher margin target, buyback plan

* Sees margins up 175 basis points over 3 years

* Targets 700 mln pounds in savings, up from 500 mln pounds

* Buying back up to 1.5 billion pounds of stock in FY18

* Shares jump more than 6 pct to record high (Adds analyst comment, background)

By Martinne Geller

LONDON, July 27 (Reuters) - Britain’s Diageo raised its profitability target and announced a share buyback programme on Thursday, sending shares in the world’s largest spirits company to an all-time high.

Analysts said the influence of the new chairman, Javier Ferran, was being felt with a tight rein on costs at the firm that makes Johnnie Walker whisky and Smirnoff vodka.

Diageo, whose shares jumped more than 6 percent, reported sales of 12.05 billion pounds ($15.83 billion) in the year ending June 30, up 4 percent excluding the impact of the weak British pound, which boosts the value of overseas revenue.

Operating profit rose about 6 percent to 3.6 billion pounds, excluding the currency benefit, due to improvements in productivity and cost-savings.

“We had expected new chairman Ferran to bring greater rigour on costs, however the upgrade has come sooner than expected,” Jefferies analyst Edward Mundy said in a note.

Earnings would get a 1 percent lift this financial year from the buyback and 2 percent next year from the higher margin target, he said.

Ferran, a private equity specialist with a background in consumer goods, took up the post of chairman in January.

The buyback and new margin target suggest Diageo is heeding demands made by shareholders of other consumer goods makers, such as Nestle and Procter & Gamble, as the sector grapples with slowing growth due to changing consumer tastes.

Nestle posted worse-than-expected sales on Thursday and trimmed its outlook.

Diageo, which has adopted a stringent system of accounting where budgets must be approved from scratch, said it now expected 700 million pounds of savings over three years, with two-thirds of that being reinvested in the business. Its previous target called for 500 million pounds of savings.

As a result, it raised its margin improvement objective from 100 basis points to 175 basis points over the three years to June 2019. The company stood by its target for sales to grow at a mid-single digit rate.

Diageo also plans to buy back up to 1.5 billion pounds worth of stock in the financial year that began this month, aiming for a debt ratio of 2.5 to 3 times earnings, up from 2 times now.

Chief Financial Kathryn Mikells told reporters Diageo still had capacity for more acquisitions, like one announced last month for George Clooney’s tequila brand Casamigos.

Diageo shares were up 6.2 percent at 2412 pence, after rising as high as 2429.5 pence.

$1 = 0.7614 pounds Reporting by Martinne Geller; Editing by Edmund Blair

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