A long wait for earnings growth

The Investment Column

There is nothing wrong with Allied Domecq's underlying strategy - of focusing on spirits and retailing - but until it completes the sale of its Lyons food businesses and gets out of brewing, or sorts the operation out, generating decent earnings growth will remain a distant prospect.

Tony Hales, the chief executive, likes to play down the importance of Carlsberg-Tetley and Lyons. But they account for almost a fifth of profits so their appalling performance in the year to March matters. Falling profits in 20 per cent of the business present the other divisions with a tough task to catch up.

After a swing from disposal losses to profits, pre-tax returns were 12 per cent up to £716m. Earnings per share, as the table shows, increased 11 per cent, allowing a 6 per cent dividend rise.

Worst hit was Mexico, where high interest rates subdued demand and volumes slipped 6 per cent, but in all markets increased marketing expenditure, up 12 per cent, was needed to push volumes a more modest 3 per cent ahead. Price increases continue to remain elusive.

The integration of Domecq, acquired a year ago in an ambitious £739m deal, is still in its infancy and analysts remain non-committal on how successful it has been. What is apparent from yesterday's thinly disguised profits warning is that the Mexican arm is going to be clobbered this year by the devaluation of the peso. Last year's £49m profit would have been just £28m at current exchange rates.

The other main division, retailing, is another curate's egg. Margins held up at 12 per cent thanks to better performances from the relatively small Victoria Wine and international franchising operations. But the major profit earners - the managed pubs, Dunkin Donuts fastfood outlets and the Baskin Robbins ice cream business - are having to run hard just to stand still.

Just managing that, however, would suit Carlsberg-Tetley, where the extent of the culture clash between the joint venture partners and the general pressures affecting the whole industry resulted in a 21 per cent fall in profits and a 25 per cent reduction in margin.

At Lyons, a similar fall in profits from £86m to £67m was (weakly) excused by the fact that the management is operating under the shadow of disposal.

Allied has been a dismal investment over the past four years or so, underperforming the rest of the market by more than a quarter. With earnings growth looking forward of only about 5 per cent a year, compared with twice as much for Guinness, for example, it is hard to see the shares, down 12p to 533p, doing any better in the near future. A prospective yield of 5.6 per cent, however, means Allied is a safe enough income stock.

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