Why Ferran took shares in Diageo

Diageo’s chairman designate, Javier Ferran, has spent more than £410,000 buying 18,500 shares in the company at 2,221p each. Ferran, the former head of Bacardi who is also a director of Associated British Foods, will replace Swiss businessman Dr Franz Humer as chairman of the distilling and brewing giant in January.

It is normal for an incoming chairman to show faith in his new company by investing in it, but even so Ferran’s taking a sizeable stake before actually joining emphasises the positive aura that has developed around Diageo’s shares, especially since Britain’s referendum vote to leave the European Union.

The shares soared to a record 2,285p during trading on Tuesday, a rise of some 23% since the start of the year. Despite that, none of the London stockbrokers who analyse Diageo are encouraging clients to take their profits and sell. Some rate the stock merely as “hold”, but most are telling clients that the world’s largest premium alcohol brand group is a “buy” or a “strong buy”. In other words, they all calculate that Diageo’s prospects are bright and should get stronger.

The post-Brexit surge is not hard to understand. The value of sterling has plummeted to a 31-year low against the dollar, with its value against most major currencies also taking a big hit. And the lower value of the pound means that profits earned overseas are magnified when converted into sterling.

Only 10% of Diageo’s revenues come from the UK, while North America accounts for 35% of its net sales and 40% of operating profits. Sales in the region grew by 3% in the year to the end of June and are predicted grow faster in the current financial year as brands such as Crown Royal and Bulleit further enhance their positions in the market.

The same is largely true of other key markets. Long-stagnant Europe is showing signs of recovery and the anti-extravagance slowdown in China seems to have bottomed. India offers excellent potential – especially as the cloud created by the Mallya affair has dissipated and any associated costs have already been accounted for. Growth prospects are also strong in Africa where Diageo is leveraging its position in beer to develop markets for its spirits portfolio.

But internal profitability is only one part of the surge in the shares. With interest rates set to fall even further before Christmas, possibly to zero, savers are desperately searching for income, and preferably safe income.

Step forward Diageo, whose dividend has risen consistently throughout this century. Backed a solid balance sheet and the potential of further share price increases, little wonder investors are attracted.

So Ferran was being more than just loyal when he spent his £410,000 on Diageo shares. He no doubt calculates that it is a three-way winner. Not only has the company strong growth prospects, but it is a major beneficiary of sterling’s slump and investors suffering from record low interest rates.

That could change. The Brexit negotiations will bring uncertainty and the market overall looks very frothy and could fall suddenly. But overall, investors are toasting Diageo.