The world's leading wine and spirit producer Diageo today said that trading for its first three months of the year had "been in line" with its expectations. The company therefore confirmed its previous full year guidance.

In September, the company said underlying sales had grown 6% and operating profit 7% in the year to June 2004. It said it was anticipating similar levels of growth in the current year.

The news disappointed some analysts who had been expecting Diageo to raise its growth estimates. Shares in the company fell slightly on the news.

Speaking at the AGM today, Diageo CEO Paul Walsh also said that £600m of the net proceeds received from the recent sale of common stock in General Mills will be used by Diageo to repay debt.  The balance of £600m of the net proceeds received will be returned to shareholders as part of a larger on-market share buyback programme in the current financial year - the year ending 30 June 2005.

Diageo said it expects to continue to return to shareholders the surplus capital which arises from free cash flow and other opportunities which may improve financial ratios on an on-going basis.

"We intend to do so at a rate, which is consistent with our view of capital structure, and of course subject to market conditions. We believe that the most appropriate mechanism by which to return surplus capital is through a combination of an on-market share buyback programme and dividend payments," Walsh said. 

From the beginning of Diageo's 2006 financial year, in July 2005, Diageo intends to rebalance the return to shareholders of surplus capital arising from free cash flow between buybacks and dividends and to gradually build dividend cover over time from the current level.

While final decisions on annual dividends will continue to be taken in the light of earnings performance, inflation and other external factors, Walsh said the Diageo board would expect, from February 2006, to hold the company's dividend increase to shareholders to around 5% annually until dividend cover moves towards 2.0 times.