Spirits Growth Returns to Diageo plc in 2016

By Markets Fool.com

Image source: Getty Images.

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The fiscal year has come to a close at spirits-maker Diageo(NYSE: DEO), and while the headline numbers may not show it, 2016 was a turnaround year for the company. Volumes grew around the world, and key brands came back into favor with customers.

But Brexit complicated results for the U.K.-based company, so investors need to look at the full picture to gauge how the company is doing. Here are the key takeaways for investors from fiscal 2016.

Diageo plc results: The raw numbers

Metric

2016 Actuals

2015 Actuals

Growth (YoY)

Sales

10.5 billion pounds

10.8 billion pounds

(3.0%)

Net Income

2.2 billion pounds

2.4 billion pounds

(5.8%)

Adjusted EPS

89.5 pence

95.0 pence

(5.8%)

Source: Company earnings release.

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What happened with Diageo this quarter?

The drop in the British pound, as well as acquisitions and disposals, complicates the raw earnings figures above. Here are a few items that offer a better picture of Diageo's business:

  • Organic volume grew 1.3% worldwide, driven by 9% growth in Africa. North American volume increased just 1%, but sales were up 3%, and operating profit grew 4%.
  • Every major market experienced improved organic growth versus 2015 with 70% of overall growth coming from North America, Europe, Russia, and Turkey.
  • Acquisitions and disposals (310 million pounds), exchange rate changes (172 million pounds), and a reclassification in the way net sales are recorded in Asia Pacific (122 million pounds) resulted in the decline in sales you see above. Without those changes, organic sales grew 2.6% from a year ago.
  • Diageo's global-giant brands, which include Johnnie Walker, Smirnoff, Captain Morgan, Guinness, Bailey's, and Tanqueray, all grew organic net sales during 2016. That's a sharp improvement from a year earlier when only Tanqueray displayed any growth.
  • Margins also expanded on an organic basis from 28.35% in 2015 to 28.69% in 2016.

What management had to say

The uncertainty in Britain is certainly throwing Diageo for a loop, but management said it's working with the government to make sure it has access to the markets it serves.

Within what management can control, the company is performing well. International markets are taking to Diageo's products, particularly in Africa, and U.S. consumers are trending toward more expensive brands. That has helped both top-line growth, as well as bottom-line profitability for Diageo.

Looking forward

The spirits business is facing the same macro challenges as any multinational company with currencies and growth rates fluctuating around the world. But at the core, customers are buying more volume and trending toward high-margin products from Diageo. Management's long-term growth strategy is working, and as long as the global economy continues its slow growth, the company should do the same.

The scale and high-value brands Diageo has built is a lasting model that should continue to throw off cash flow and dividends for years to come. That's a Foolish investment if I ever saw one.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Diageo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.