Diageo lifts 2016 guidance after serving up flat annual sales

Annual sales from Diageo were flat but the drinks giant put some fizz into its preliminary results with a 9% increase in the final dividend and pumped up its guidance for 2016.

While reported net sales of £10.8bn were flat on volumes down 1% on an organic basis to £246.2m in the year to 30 June.

Operating profits before some small exceptional items were up 1% on an organic basis to £3.07bn, with profit before tax down 7% to £2.7bn and earnings per share before exceptional items were down 7% to 88.8p, as anticipated.

Chief executive Ivan Menezes was bullish about the company's "enviable position" in its geographic spread and depth of brands and category range, in what he continued to see as an attractive consumer market with strong long term growth drivers.

This may have been a deciding factor behind the surprise 9% increase in the final dividend to give recommended full year dividend of 56.4p.

This decision reflected strong free cash flow performance, up £0.7bn to £2bn, and was accompanied by plans to rebuild cover from the current level of 1.6 times through mid-single-digit increases.

After investment to increase productivity this year, Menezes said management was "delivering the change which will further strengthen this business and deliver our performance ambition".

For the new financial year the expectation is that stronger volume growth will deliver an improved top line performance.

Menezes set new guidance of mid-single-digit organic sales growth "on a sustained basis", with operating margin expansion of 100 basis points over three years.

"Our brands, our global footprint and our people give me confidence that Diageo can deliver strong and sustained performance."

Broker Shore Capital said the results were broadly in line with its and the market’s expectations from an organic sales and profit perspective with a flat top line and slight growth in profitability, although marketing spend has declined on an organic basis as the company highlight procurement savings in this area.

"The results to some extent were anticipated so the outlook is arguably the most important feature."

Management’s decision to increase the full year dividend by 9%, "will come as a surprise" and "seems a strange move to us".