Why has Diageo’s chairman bought £1m worth of shares in a year?

Diageo’s chairman, Javier Ferrán, has given the world’s biggest premium drinks company a vote of confidence by continuing to buy its shares, adding a further £1 million worth in the last year. But why has he done so?

At the end of last year his holding was worth almost £5.5m and he has added almost a further £1m worth over the past 12 months.

At the start of the year Diageo’s shares were priced at about £25 each but Ferrán has bought in over the past 12 months at an average price of more than £32, indicating his confidence in the company’s prospects.

Of course, the Diageo story is one of progress and profitability over the past 20 years. It has continuously increased its dividend and its shares have soared.

But the real impact has been seen since Ivan Menezes took over as chief executive in July 2013. Then the shares stood at about half of today’s £33-plus.

Menezes had been chief operating officer under Paul Walsh, and had previously run the American arm, so he knew the business intimately. But after a short period settling into the top job he began driving down on costs and focussing Diageo even further on premiumisation, selling off its wine businesses and buying brands such as Casamigos.

The potential minefield left by Vijay Mallya at India’s United Spirits was neatly sidestepped so that as one Diageo executive put it recently: “It’s now a sideshow for the lawyers.”

One of the reasons the Wall Street activist investor Elliott bought a stake in Pernod Ricard a year ago was, it said, because it saw scope for the French company to close the gap with Diageo in terms of margins and returns to investors.

As non-executive chairman, one of Ferrán’s roles at Diageo is to stand above daily management of the business and be a touchstone for Menezes and his fellow directors to consult on long-term direction. As a former CEO of Bacardi, he is ideally placed to do so.

And being a partner in Lion Capital, one of Britain’s sharpest investment groups, further underlines the signal he is sending by adding to his personal stake in Diageo.

He is not alone in his assessment that the group, now valued at some £77 billion, will continue to flourish. None of the City’s leading drinks analysts suggests selling Diageo’s shares.

Diageo is confident it will handle Brexit and has already forecast percentage growth in the mid single digits for the current financial year. It also plans to buy back and cancel up to £4.5 billion worth of its equity by 2022. That will only increase the value of remaining shares.

Menezes is a youthful 60 and there is no suggestion that he is looking to step aside as the strategies he has put in place reap their rewards. The key American market is doing well, long-term expansion of Scotch production facilities is under way and the huge potential of emerging markets in China and India are beginning to bear fruit.

A chairman’s responsibilities include providing the chief executive with the tools to run the business and monitoring his performance as well as planning for long-term succession. Pernod Ricard groomed Alexandre Ricard for the top job for more than a decade. Ferrán’s continued stake building suggests that he is very happy with Menezes, but it also shows his confidence that the business will thrive even if an unforeseen calamity were to strike.