Diageo (LSE:DGE) shares climbed as much as 7.8% on Thursday after the spirits group unveiled a restructuring programme aimed at delivering $1 billion in cost savings, helping investors look beyond a sharp decline in annual profit and a reduced dividend.
The owner of Johnnie Walker and Guinness reported operating profit of $3.16 billion for fiscal 2026, down 27.2% from the previous year. The decline was largely driven by $1.5 billion of impairment charges, mainly linked to hyperinflation in Türkiye and the write-down of the Don Papa brand.
Excluding these exceptional items, organic operating profit increased 2%, while the group’s organic operating margin improved by 116 basis points.
Sales and earnings pressured by North America and China
Net sales declined 3% to $19.64 billion during the year, while organic net sales fell 2.0%. Volumes slipped 0.4% and price and product mix reduced sales by a further 1.6 percentage points, largely reflecting weaker performance in the U.S. spirits market and Chinese white spirits.
Diageo said that excluding Chinese white spirits, organic net sales would have been approximately 1.5 percentage points higher.
Growth across Europe, Africa, and Latin America and the Caribbean helped offset softer trading conditions in North America and China.
Net profit fell 22.9% to $1.96 billion, while basic earnings per share declined 26.3% to 78.1 cents. Earnings per share before exceptional items edged up 0.7% to 165.3 cents.
Free cash flow improved by $463 million to $3.2 billion, while net debt stood at $20.5 billion, equivalent to 3.1 times adjusted EBITDA.
Dividend reduced under new capital allocation policy
The company recommended a full-year dividend of 50 cents per share, compared with 103.48 cents in fiscal 2025, reflecting its revised dividend policy.
The proposed final dividend was set at 30 cents per share, down from 62.98 cents a year earlier, subject to shareholder approval at the company’s annual general meeting in November 2026.
Restructuring programme targets long-term growth
Alongside its annual results, Diageo outlined a restructuring strategy designed to generate approximately $1 billion in cumulative savings over the next three years.
The initiative will focus on redesigning the company’s operating model and improving supply chain efficiency, with total implementation costs estimated at around $1.2 billion.
Management expects the operating framework changes alone to deliver approximately $850 million in savings over two years, with around 40% expected during fiscal 2027 and the remainder in fiscal 2028.
For fiscal 2027, Diageo expects broadly flat organic net sales, with North American sales likely to decline in a market that management estimates is contracting by about 3%. Organic operating profit is forecast to grow at a low- to mid-single-digit rate.
The company expects free cash flow of around $2 billion in fiscal 2027 after absorbing approximately $850 million in restructuring-related cash costs.
Looking further ahead, Diageo is targeting low-single-digit annual organic net sales growth, mid-single-digit organic operating profit growth and cumulative free cash flow of around $8 billion between fiscal 2027 and fiscal 2029.
Chief Executive Sir Dave Lewis said the company was “focused on recovering” North America and “working through the consequences of Government policy in Chinese white spirits,” adding that the revised operating framework “will allow us to invest in the turnaround without needing to reduce operating profit.”
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