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Some of the tariffs announced last month by the US administration have been rolled back. However, even if just the residual 10% tariffs remain in force, it would still be the highest tariff regime since the aftermath of World War II.
FTSE 100 companies are feeling the pinch too, with a trading update today (19 May) from one in particular catching my eye.
Time for a stiff drink?
I’m referring to Diageo (LSE:DGE), which released an update detailing a $500m cost-cutting programme, mostly due to the hit from US tariffs. It anticipates a $150m annual impact from the levies, which it expects to be able to mitigate by 50%.
To be clear, this isn’t with reference to the US and China trade spat, which appears to be cooling. Rather, the financial hit is “assuming the current 10% tariff remains on both UK and European imports into the US, that Mexican and Canadian spirits imports into the US remain exempt under USMCA, and that there are no other changes to tariffs”.
If anything, this is the best-case scenario, which still leads to that $150m impact!
The management team continues to work on mitigating this further. As a positive, the expected impact in fiscal 2025 and fiscal 2026 is included in the stated financial guidance. This has helped to stem short-term share price losses, although the stock’s down 24% over the past year.
Reasons to be positive
Despite the bad news coming out on this front, the results from the past quarter were actually quite impressive. Organic net sales were up 5.9% in the quarter, with organic volume up 2.8%. All regions except for Asia Pacific performed well, showing a diversified contribution spread. It’s not like one area’s holding up the entire company, something that I’d see as a bit of a red flag.
Of course, the focus in the short term will be on cost-cutting measures to deal with the impact of tariffs. But over time, this efficiency drive could be a real positive for the stock, especially if organic sales keep growing. In that scenario, higher revenue and lower costs should equate to a bigger profit.
Let’s also not forget that the business has been successfully operating for decades. The actions of one President might be a speedbump in the road, but it’s not like the firm can’t survive going forward.
A potential dip to buy?
I believe there could be some more pressure on the stock in the coming weeks as investors react to this news. However, I think people could look at this as an attractive long-term dip to consider buying, given the robust fundamentals. When I look a couple of years down the line, I don’t see tariffs as still being a headache for the management team to content with.
