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Diageo knocked to ‘sector perform’ as RBC says firm will no longer be able to grow margins faster than peers

The Canadian bank also expected firms across the sector to “spend quite a lot of time thinking about the best ways to safeguard the resilience of their businesses” and boost spending to withstand future shocks

Diageo PLC - Diageo knocked to ‘sector perform’ as RBC says firm will no longer be able to grow margins faster than peers

Diageo PLC (LON:DGE) has been downgraded to ‘sector perform’ from ‘outperform’ by analysts at RBC, who forecast that the Guinness will no longer be able to grow margins faster than other consumer staples firms.

In a note on Monday, the Canadian bank also cut its target price to 2,400p from 3,000p, saying they expected consumer staples firm to “spend quite a lot of time thinking about the best ways to safeguard the resilience of their businesses” and that this will “necessitate additional expenditure – revenue and capital – to ensure that their operations incorporate more deliberate duplication and redundancy than has been the case”.

READ: Diageo doles out interim dividend payment but stops share buyback for 2020

“We expect Diageo to be as caught up in this trend as anyone else”, RBC said, adding that while they had previously forecast that Diageo would grow its long-term earnings (EBIT) margins by around 50 basis points per annum from 2023 to 203, they were “no longer convinced, given the opacity of the medium-term outlook and the requirement we anticipate for companies to increase spending in beefing up their resilience”.

“We now assume that Diageo’s EBIT margin will decline by 10 [basis points] per annum from 2023E-30E in common with the rest of the stocks we cover”, the bank concluded.

Shares in Diageo were down 1.6% at 2,668.5p in lunchtime trading.

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