Analysis

Analysis - Bumps could become Hurdles for Diageo

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For as long as many of us can remember, international spirits has been a profitable category for investors.

Most reliable in the sector has been Diageo, which has seen its share price perform incredibly well in the past ten years.

But, the future for the drinks giant may not look as rosy as its past, according to one industry observer. Writing on The Motley Fool's website today (17 March), Royston Wild warns of some bumps in the road for Diageo. While much has already been made of the slowing growth from emerging markets like China - a fact that has hit Diageo hard, thanks to its reliance on these markets for growth - Wild highlights Diageo's struggles with a contracting beer market in Nigeria and “significant destocking” in West Latin America & the Caribbean.

Not only that, but increased marketing spend around the world has dented the company's bank balance of late. “Cash generated from operations collapsed to GBP1.17bn (US$1.95bn) during July to December, from GBP1.43bn during the corresponding 2012 period, while free cash flow crumbled to GBP326m from GBP708m over the same period,” says Wild.

This increased investment in marketing, which has become a necessity more than a desire for Diageo, could hamper M&A activity going forward, with dividends also expected to bear the brunt.

We watch with interest to see if these bumps will push Diageo to change course in the years ahead.


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