Diageo shares leap to all-time high on £1.5bn buyback plan

SHARES in Diageo surged 6pc to an all-time high after the spirits giant pledged to spend £1.5bn to buy its shares back from investors.

The Smirnoff vodka and Johnnie Walker whisky maker said it had further reduced the costs of running the business and so had been able to free up money for the shareholder windfall.

Kathryn Mikells, the chief financial officer, said initiatives such as more focused marketing, reducing waste and making sure its production processes were cost efficient meant the business had generated free cash of £2.7bn, up from just £1.2bn in 2014.

The company said the initiatives meant it was also raising its expectations for how much it will improve margins, from 100 basis points for the three years to June 2019 to 175bps.

Ms Mikells said the buyback would not detract from its investment plans, which include upping advertising and promotion spending, as well as more capital-intensive projects, such as its forthcoming brewery in Kenya and planned distillery for its Roe & Coe brand near the Guinness site in Dublin.

The finance chief also said the company’s robust cash generation meant its net debt to earnings ratio – a metric used to show how leveraged a company is – had fallen to 2pc in spite of management’s stated guidance of usually keeping it between 2.5pc and 3pc.

She said this meant the company had “plenty more firepower” for acquisitions, even after spending $700m (£533m) on tequila brand Casamigos, with a further potential $300m over 10 years based on performance criteria.

The announcement of the buyback came as the company posted an 18pc rise in sales to £18bn, pushing pre-tax profits up 24pc to nearly £3.56bn.

Sales of its Scotch whisky brands, which make up 25pc of net sales, rose 5pc thanks to growth in all regions except for Asia-pacific. Vodka performed less well, with net sales down 4pc due to a weak performance in all regions except for Africa.

Its shares rose 136p to £24.09.