Higher oil prices leave sour taste at Diageo

Diageo reported a 10 per cent rise in underlying earnings today, but its shares fell on dashed hopes that the group might raise…

Diageo reported a 10 per cent rise in underlying earnings today, but its shares fell on dashed hopes that the group might raise current year targets.

The world's biggest alcoholic drinks said its operating profit will grow by "at least" 7 per cent in its current financial year, but investors had been looking for more after a run-up in the share price.

The company reported that underlying earnings per share rose to 50.5 pence in the year to June 30th, which fell short of the average of analysts' forecasts of 51p and was at the bottom of the range of 50.3 to 52.1p.

The company increased its full-year dividend by 5 per cent to 31.1p a share.

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Its shares were down 2.4 per cent at 936p by 8:30am to be the FTSE 100 index's biggest loser after a steady rise in the share price since late May, while they had outperformed the index by 8 per cent since the start of 2006.

Diageo said underlying sales rose 6 per cent and operating profit 7 per cent, in line with its targets, and it reiterated that it expected a similar rise in sales and at least a 7 per cent rise in operating profit in the current year.

But Finance Director Nick Rose added a note of caution due to higher input prices, while the group increased marketing spend above sales growth and it continued to see some poor geographic trading spots around the world.

He added that marketing spend rose 8 per cent in the year, ahead of the 6 per cent sales rise and would continued to run 1-2 percentage points ahead of sales this current year.

Higher input costs, largely due to oil prices, added an extra £25 million to costs, and the company said some market areas of the world were tough like Europe, which saw flat sales, and the Middle East and its duty-free business after the recent conflict in the area and travel scares.

In Ireland, the migration from pub to home drinking  dented beer sales but wine volume grew 7 per cent driven by Blossom Hill's robust growth in Britain and Ireland.

In Ireland sales of Guinness declined 3 per cent as a result of price increases introduced in June 2005 and May 2006. Guinness sales were also hit by stiffer competition and the movement to the off trade where Guinness' share is lower.

Sales of Baileys fell 8 per cent due to increased competition from what Diageo calls "lower value brands".