Shares in Diageo (LSE:DGE) simply fell 12.5% right this moment (25 February) because the FTSE 100 agency introduced a 50% dividend minimize. I’m a shareholder, so what ought to I do with my funding now?
Warren Buffett says it’s by no means factor when an organization cuts its dividend. However in some circumstances, it may be the proper determination and I feel that’s the scenario right here.
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No shock
The share worth has reacted violently to the most recent information. In doing so, it’s reversed just about all the positive factors it had made since Sir Dave Lewis took management.
My view, although, is that buyers shouldn’t be shocked. I mentioned again in December that I used to be planning for a possible dividend minimize and urged that different buyers may wish to do the identical.
One purpose is that it’s in no way unusual for a brand new CEO to wish to begin from scratch, particularly in a turnaround scenario. And slicing the dividend was one of many first issues Lewis did at Tesco.
Since then, reviews have emerged that Diageo is seeking to unload a few of its non-core belongings to boost money. However doing that whereas sending money out as dividends can be an odd use of capital.
Strategic outlook
In addition to the dividend minimize, Diageo reported plans to give attention to being extra aggressive on pricing. That is prone to end in decrease margins, however the hope is that quantity development ought to make up for it.
The spirits market within the US has been steady and the declining gross sales have come from shedding out to opponents. However I’m cautious concerning the change of technique within the present surroundings.
The scenario within the US is that inequality is widening. Low-income households have confronted growing strain on budgets whereas increased earners have usually been comparatively immune.
In that surroundings, making an attempt to spice up the mass market enchantment of Diageo’s merchandise appears to be like like a danger to me. It entails shifting away from the agency’s identification as an organization centered on premium merchandise.
What I’m doing
The dividend minimize is perhaps a nasty factor for buyers searching for earnings within the subsequent couple of years. However from a long-term perspective, I feel the transfer is the proper one for the enterprise.
Whereas I’m not totally satisfied concerning the change in technique, Diageo does have some key strengths that may make this strategy efficient. One is the dimensions of its distribution.
Usually, corporations that want to compete on worth want a way of preserving their very own prices down. And economies of scale are a very good instance of this.
In consequence, I’m cautiously optimistic concerning the future for the corporate. So I’m planning to carry on to my shares in the interim and see how issues go.
No sale
I’m totally on board with Diageo’s determination to chop its dividend. I’ve thought for a while that this may need been on the playing cards and I feel it’s the proper factor to do.
I’m much less satisfied, although, concerning the shift in the direction of competing on worth. However at right this moment’s costs, I feel there’s good worth on provide, which is why I’m not seeking to promote after right this moment’s announcement.
