Diageo cuts dividends and US sales decline worsens, stock price plummets

Investing.com - Diageo announced a more than 50% cut to its mid-term dividend on Wednesday, along with downward revisions to its full-year sales and profit guidance. Previously, the company reported a 6.8% organic decline in North American net sales in the first half of fiscal 2026, dragging down overall group revenue and raising questions about whether its largest market can recover. Its stock fell more than 6%.

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This UK spirits maker’s brands include Johnnie Walker whisky and Don Julio tequila. Its organic net sales in the first half fell 2.8% to $10.46 billion, below analysts’ expected 2% decline.

Organic operating profit declined 2.8%, better than the market’s expected 3.9% drop, while adjusted EPS was 95.3 cents, above the market forecast of 93.1 cents.

The mid-term dividend was cut from 40.5 cents per share last year to 20 cents. The company said it will adopt a dividend payout policy of 30-50%, with a minimum annual dividend of 50 cents.

The collapse of the US spirits business was the biggest drag on performance. Don Julio tequila net sales fell 20.9%, Casamigos declined 30.9%, reflecting the company’s description of “weak tequila category, increased competition,” and a trend of consumers downgrading their spending.

Diageo maintained or gained overall market share in about 30% of the measurable market. In the US, total alcohol beverage share declined by 9 basis points, with the US market accounting for about 35% of the total measurable market net sales.

CEO Sir Duffy Lewis said, “The US spirits performance reflects disposable income pressures and competition from more affordable alternatives targeting consumers with tighter wallets.”

Greater losses occurred in Greater China, with organic net sales down 42.3%, mainly due to a 50.4% decline in Chinese baijiu sales caused by market policy changes. Excluding China’s baijiu business, the group’s organic net sales would have grown about 2%.

Contrasting these declines, Europe achieved 2.7% organic net sales growth and 9.1% growth in organic operating profit, mainly driven by Guinness beer, which saw a 10.9% increase in organic net sales outside Asia-Pacific. Organic net sales in Africa grew 10.9%, and Latin America and the Caribbean increased 4.5%.

For fiscal 2026, Diageo currently expects organic net sales to decline 2-3%, compared to previous guidance of flat to slightly down, with market expectations at a 1.1% decline. Organic operating profit is expected to be flat to low single-digit growth, down from prior forecasts of low to mid-single-digit growth. The free cash flow guidance of about $3 billion remains unchanged.

As of December 31, net debt was $21.7 billion, with a net debt to adjusted EBITDA ratio of 3.4x. In December, Diageo agreed to sell its stake in East African Breweries Limited to Asahi Group Holdings, expected to net $2.3 billion. The deal is expected to reduce leverage by about 0.25x after its completion in the second half of the 2026 calendar year.

The accelerated cost-saving program is now expected to achieve about 50% of its $625 million three-year target in fiscal 2026, up from previous guidance, with roughly 40% already realized in the first half through supply chain, advertising, and management expense efficiencies.

Sir Duffy Lewis, who took office on January 1, said the company faces “a lot of work” and outlined three immediate priorities: building a competitive category strategy, strengthening customer relationships, and redesigning operating models. A more comprehensive strategic update is expected in summer 2026.

Jefferies analyst said, “While we do not expect substantial changes to market expectations for EBIT/EPS in fiscal 2026 today, given weaker revenue growth momentum, there could be some minor downward revisions for fiscal 2027.” The firm maintains a “Buy” rating with a target price of 2,000 pence, noting that the core debate hinges on whether profit forecasts will be further reset once strategic details are announced.