July 26, 2018 / 10:50 AM / 21 days ago

Diageo announces buyback as sales perk up on pink gin

LONDON (Reuters) - Britain’s Diageo (DGE.L), the world’s largest spirits company, announced a 2 billion pound ($2.6 billion) share buyback program on Thursday and better-than-expected full-year sales growth, helped by a gin boom in Western Europe.

The British maker of Johnnie Walker Scotch and Smirnoff vodka reported net sales of 12.2 billion pounds, up 5 percent on an organic basis, higher than the 4.3 percent growth forecast in a consensus supplied by the company.

Diageo said Tanqueray gin performed well in Europe and the launch of Gordon’s pink gin also offered a boost.

Earnings per share, at 118.6 pence, also beat forecasts.

Diageo stood by its mid-term expectations, saying it forecast mid-single digit organic net sales growth and 175 basis points of organic operating margin expansion for the three years ending 30 June 2019.

“We fully accept that Diageo has good momentum but we also note that the valuation is near all-time relative highs,” said analysts at Mirabaud, which has a “sell” recommendation on the stock.

“With the recovery story fully played out at this point, catalysts for still further share price upside seem limited,” they wrote.

Diageo shares were down less than 1 percent at 1018 GMT.

The company also forecast some near-term headwinds for the new financial year that started in July, regarding currency exchange rates, tax and interest rates.

It said foreign exchange rates would reduce full-year sales by 70 million pounds, and operating profit by 10 million pounds.

It expects a tax rate of 21 to 22 percent, up from 20.7 percent in the financial year ending June 30, and also expects a net effective interest rate of 3.3 percent in fiscal 2019, up from 2.6 percent in fiscal 2018, due to anticipated increases in interest rates.

Diageo said it approved a share buyback program of up to 2.0 billion pounds for the year ending 30 June 2019.

Reporting by Uday Sampath Kumar and Martinne Geller; Editing by Jason Neely and Edmund Blair

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