Liberum ups Diageo to 'buy'

Analysts at Liberum upgraded drinks maker Diageo from 'hold' to 'buy' on Tuesday, stating that they were confident that the firm's brands and hard to replicate route-to-consumer path would survive the Covid-19 pandemic.

Liberum said the forced closure of high margin on-trade outlets and diminished celebratory occasions had "clearly hurt" Diageo's earnings, but it still passed the investment bank's cash flow stress test.

However, the analysts said that if Diageo's board decides to pay out the same dividend per share as last year, net debt/underlying earnings could reach 4.0x in 2020.

Liberum said Diageo paying out its dividend would likely mean it would miss out acquiring "crown jewel spirit assets" and stated the firm should consider "hoarding its dividend", only to pay it out later if such a deal does not arise.

"This degree of indebtedness precludes opportunistic M&A and is a reason for Diageo to hoard its dividend," said Liberum.

The analysts said Diageo was very cheap relative to history and stated that despite headwinds, the stock had entered "attractive territory".