Diageo (LSE: DGE) (NYSE: DEO.US) is a firm that I rate highly, but when I took a closer look at the drink giant’s 2013 results recently, I did notice a ‘hidden nasty’ that I feel is worth bringing to your attention.
Read this and stop
Near the top of Diageo’s 2013 preliminary results is a table called ‘key financials’. It’s probably fair to say that Diageo wants investors to focus on these figures — and that many shareholders won’t read much further than the final line of the table, which reveals a 9% increase in the firm’s full-year dividend.
After all, with profits up, dividend up and sales up, what could possibly be wrong?
Rising profits?
In fairness, nothing much is wrong with Diageo’s business, but the key financials table paints a picture that is a little rosier than reality.
Halfway down the table is a line called ‘profit attributable to parent company’s equity shareholders’. This figure represents post-tax profits and it rose by 28% last year, from £1,942m in 2012, to £2,485m in 2013.
It’s an impressive increase for shareholders, as it’s these profits that are used to calculate basic earnings per share, which also rose by 28% last year, from 77.8p to 99.3p.
Tax trickery
The only problem is that Diageo’s pre-tax profits were almost unchanged last year — £3,121m in 2012 and £3,123m in 2013. If pre-tax profits are equal, and post-tax profits are different, then the difference must be tax.
A quick scan of Diageo’s income statement appears to confirm this — Diageo’s tax bill fell from £1bn in 2012 to just £529m in 2013.
What happened is that Diageo agreed some new taxation guidelines in 2012, which changed the way it pays tax on some of its profits. As part of this deal, it wrote off £524m of ‘deferred tax assets’ in 2012, which showed up as a tax payment on Diageo’s 2012 income statement, hence the £1bn total.
The only problem is that this was purely an accounting exercise: Diageo’s cash tax payments, like its profits, were almost identical in 2012 (£521m) and 2013 (£556m).
In fairness to Diageo, these factors are explained in the results, but any shareholder simply looking at the headline figures could easily have concluded that Diageo’s profits grew strongly in 2013, when in fact, they were almost unchanged from the previous year.