Diageo resumes £4.5bn return to shareholders

Scotch Whisky and drinks giant Diageo plc announced on Wednesday it will resume its return of capital (ROC) programme of up to £4.5 billion to shareholders.

Diageo shares rose about 4%.

“Diageo plc today announces that it expects organic operating profit growth to be at least 14% in fiscal 21, slightly ahead of organic net sales growth,” said the company in a trading statement.

“In the context of this strong performance, Diageo is recommencing its return of capital (ROC) programme of up to £4.5 billion to shareholders announced on 25 July 2019.

“Due to the impact of Covid-19, the original completion date for the ROC programme has been extended by two years to 30 June 2024.”

Diageo CEO Ivan Menezes said: “When we have excess cash, we have been clear that we will seek to return it to shareholders.

“The board’s decision to resume our return of capital programme at this time reflects Diageo’s improved performance in the first half of fiscal 21 …

“We are confident that Diageo will continue to execute effectively in this challenging environment and will emerge stronger.”

Diageo in July 2019 approved the return of up to £4.5 billion to shareholders in the three-year period to June 2022 “utilising the most appropriate mechanic of either share buybacks or special dividends depending on market conditions.”

Under the first phase of the programme, which ended on January 31, 2020, Diageo repurchased £1.25 billion of shares.

On April 9, 2020, at the height of the coronavirus crisis, Diageo announced that it had not initiated the next phase of the ROC programme.

“Diageo is announcing today that it is initiating the second phase of its ROC programme of up to £1.0 billion to be completed by the end of fiscal 22,” said the company on Wednesday.

“Diageo has entered into a non-discretionary agreement with UBS AG London Branch (UBS) to enable the company to buy back shares.

“This agreement will commence on 12 May 2021 and is expected to end no later than 12 November 2021 and will be for a value of up to £0.5 billion.

“All shares repurchased will be cancelled. Further execution phases of the ROC programme will be announced in due course.”

Hargreaves Lansdown equity analyst William Ryder said: “Diageo is feeling confident enough to restart its capital return programme as a broad recovery looks set to push underlying operating profit up at least 14%.

“On the one hand, this is good news for investors, because further share buybacks will mean each remaining shareholder owns a slightly larger slice of the pie.

“But on the other, there’s a reasonable case for keeping buybacks on ice a little longer.

“Debt is still higher than is ideal.

“Management expects net debt to underlying cash profits (EBITDA) to be at the top end of the 2.5-3.0x range at the end of FY22, but we still think this would be a little higher than it needs to be.

“What’s more, the shares are currently trading on a forward PE ratio of 25.7, which is well above the long run average of 19.6.

“Diageo is a strong business with excellent brands, so while the valuation is relatively high, it’s not ridiculous.

“However, together, debt and valuation make a reasonable case for delaying further buybacks a little longer.”