Pernod profits rise but how rosy is its future?

Why, on the announcement of very buoyant annual results, did Pernod Ricard’s shares fall by 1.7% in early trading in Paris today?

Pernod Ricard chairman and chief executive Alexandre Ricard

Profits were ahead of analysts’ forecasts, shareholders are to get a bumper jump in their dividend and the company has increased its guidance for the 2018/19 financial year. Cheers all round? Well, not completely.

The most significant factor is profit-taking. Investors had expected good news, they got it and now they are cashing in, at least for the short term. Many will look for a temporary share price dip to return to the long-term growth stock in the next few months. So the share price fall is not significant overall.

But underlying that is a faint question mark about strategy. Chairman and chief executive Alexandre Ricard has reorganised and refocused the company. Its debt is substantially reduced, pricing and margins have been improved and the dividend raised by 17%. To a certain extent, those trends can be continued but in today’s announcement Ricard also strikes a cautious note, talking of “an uncertain geopolitical and monetary environment”.

Over the years, Pernod Ricard has regularly performed at the top end it its public guidance (or exceeded it) and Ricard will no doubt be confident of a further solid year in normal circumstances. But he is right that these are anxious times against a backdrop of Sino-American tariff wars and the uncertainty of Brexit.

However, one thing investors, and especially analysts, are wary of are companies that generate a bumper increases in free cash flow, as Pernod Ricard has done, and yet use it merely to expand the dividend rather than hinting at potential portfolio growth. Pernod Ricard has no problems in finding the cash to make a significant takeover if it can find the right target.

True Pernod Ricard has been under heavy pressure to increase the proportion of profits its pays as dividends to 50% from its traditional 33% and today’s announcement takes it a long way down that road. In addition, it has done much to innovate and strengthen its portfolio over the past few years, but there may be nagging doubts about where the next leap forward will come from.

So investors are cashing until Ricard gives further clues about longer-term strategy.