Shares in Diageo (LSE:DGE) simply fell 12.5% at present (25 February) because the FTSE 100 agency introduced a 50% dividend reduce. I’m a shareholder, so what ought to I do with my funding now?
Warren Buffett says it’s by no means a very good factor when an organization cuts its dividend. However in some instances, it may be the precise determination and I feel that’s the scenario right here.
Picture supply: Getty Pictures
No shock
The share value has reacted violently to the most recent information. In doing so, it’s reversed nearly all the features it had made since Sir Dave Lewis took management.
My view, although, is that traders shouldn’t be stunned. I mentioned again in December that I used to be planning for a possible dividend reduce and prompt that different traders may need to do the identical.
One purpose is that it’s under no circumstances unusual for a brand new CEO to need to begin from scratch, particularly in a turnaround scenario. And reducing the dividend was one of many first issues Lewis did at Tesco.
Since then, stories have emerged that Diageo is trying to dump a few of its non-core belongings to boost money. However doing that whereas sending money out as dividends can be a wierd use of capital.
Strategic outlook
In addition to the dividend reduce, Diageo reported plans to concentrate on being extra aggressive on pricing. That is prone to lead to decrease margins, however the hope is that quantity progress ought to make up for it.
The spirits market within the US has been secure and the declining gross sales have come from dropping out to opponents. However I’m cautious concerning the change of technique within the present atmosphere.
The scenario within the US is that inequality is widening. Low-income households have confronted growing stress on budgets whereas increased earners have usually been comparatively immune.
In that atmosphere, attempting to spice up the mass market enchantment of Diageo’s merchandise appears to be like like a danger to me. It includes transferring away from the agency’s identification as an organization centered on premium merchandise.
What I’m doing
The dividend reduce is perhaps a foul factor for traders on the lookout for revenue within the subsequent couple of years. However from a long-term perspective, I feel the transfer is the precise 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 method efficient. One is the dimensions of its distribution.
Normally, firms that need to compete on value want a way of protecting their very own prices down. And economies of scale are a extremely 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 meanwhile 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 might need been on the playing cards and I feel it’s the precise factor to do.
I’m much less satisfied, although, concerning the shift in direction of competing on value. However at at present’s costs, I feel there’s good worth on supply, which is why I’m not trying to promote after at present’s announcement.
