Guinness gives something back

Guinness is still an enigma for the City's analytical fraternity. No one questions the company's strategic direction, but analysts cannot yet pinpoint with any great accuracy when Guinness will accelerate from its recent pedestrian form to a faster rate of growth. The shares have been going nowhere for three years.

Anthony Greener, chairman and chief executive, yesterday trumped most forecasts by announcing an underlying 5 per cent rise in taxable profits to £915m and predicted steady progress in profit performance for the current year.

For all its financial strength, Guinness can do little more in the short term than swim with the tide of economic recovery in its key, and largely mature, markets in the UK, US, Europe and Japan. Its efforts to expand into emerging markets have not all been plain sailing. In Venezuela last year, rampant inflation and foreign exchange restrictions lopped £30m from profits.

The days of boosting profits through inflation-beating price increases seem to be gone for good: focusing on higher-margin brands, taking control of distribution channels and tightening up on costs are now the rules of the game.

Guinness does all three well - and there was further testimony yesterday with the sale of some low-margin peripheral brands in the US for $175m. But the drinks industry was late into recession and will be late coming out. The long-term growth story remains the untapped potential in developing economies, but turning that into value for shareholders will take time.

Fortunately for Guinness, its bedrock beer business, excluding the Spanish donkey Cruzcampo, is solid. Guinness is the world's fourth most profitable brewer. Its brewing profits rose 8 per cent to £256m, and should advance a further £20m this year, which will be greater than the combined returns from beer that will be made by Bass, Scottish & Newcastle and Whitbread.

Guinness stout is leading the way. Volume sales of the Irish nectar, which is now downed in 140 markets around the globe, grew by 1 per cent. The company's 34 per cent direct shareholding in Moet Hennessy is another bright spot.

The shares have been a disappointment since touching 600p in 1992. Yesterday's 17p rise to 438p should not be construed as a sign of greater things to come.

On projections of pre-tax profits of £975m this year, the shares trade at a slight premium to the market. The prospective price/earnings ratio is around 13. The gross yield is 4.3 per cent, assuming the dividend will again be raised by 8 per cent to 14.9p.

Yesterday Guinness said it was considering diverting some of its surplus cash flow into a share buyback programme. This underlines that there are limits to how much the company can do to spend its way into higher growth. But it also shows that management recognises the fact. Investors need to be patient before they can expect any significant rerating.