International Financial Management Analysis of the Diageo Company

This report provides a comprehensive analysis of Diageo's international financial management (IFM). It begins with an introduction to IFM, highlighting its importance for multinational corporations (MNCs) like Diageo. The main body delves into the challenges Diageo faces in the global environment, including currency risks, political instability, and the impact of events like the COVID-19 pandemic. The report then explores key IFM concepts such as the stakeholder theory, examining Diageo's dividend distribution policy and its implications for shareholder relations. It further analyzes the efficient market hypothesis in the context of Diageo's operations, assessing how market prices and information influence the company's performance. Additionally, the report evaluates Diageo's project appraisal methods, emphasizing the importance of environmental and technical analysis in decision-making. The report concludes by summarizing the complexities of IFM and the application of relevant theories, providing insights into Diageo's financial strategies and challenges.

Diageo company

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY ..................................................................................................................................3
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
The modern business environment has made it quite easy for businesses to expand their
operations as globalization has facilitated the world economies to be interconnected when it
comes exchange of goods and services across borders. Multinational companies which regularly
look towards aggressive expansion strategies to be successful and profitable in several locations
have access to a huge pool of resources but they also face many problems, the most typical being
of financial nature (Young and Legister, 2018). International financial management (IFM) is the
process of conducting financial management in an international environment related to foreign
factors such as currency and political situations. This report will highlight the challenges faced
by MNC's in a global environment along with discussion on major factors such as dividend
distribution policy, project appraisal methods and use of models like efficient market hypothesis.
This report will be executed in the organizational context of Diageo company which is a British
multinational beverage alcohol company which was founded in 1997 and is currently
headquartered in London while being a major producer of spirits and the second largest distiller
on the planet.
MAIN BODY
International financial management is a key concept in the routine working of
multinational companies like Diageo which operates in more than 180 countries as constantly
updating and regulating business variables in separate locations on a daily basis is a very tough
job. This field of financial management is quite different from domestic operations conducted by
Diageo in London as there are many new challenges present in the international arena such as
foreign exchange risks and problems related to political factors. Diageo is a major player in the
alcohol industry and it has diversified its operations in a major way as it has expanded into more
than 180 global markets and this makes it key for their managers to properly understand financial
management and its international aspects (Arnold and Lewis, 2019).
The element of currency is very important part of IFM and is also critical for the
operational working of Diageo as a major part of it's income comes from its non-domestic
markets and each and every country has its own economic conditions which governs and
influences the value of its currency and the ongoing exchange rate in the open international trade

markets. Since the 1970's, the major currencies such as dollar and pound to name a few have
undergone rapid fluctuations which has made the global markets very unpredictable to operate in
which is a major challenge for Diageo as the prices it can obtain via exchanges with its foreign
countries varies heavily upon their current economic conditions and financial capabilities.
Financial managers at Diageo have to carefully monitor the factors which influence global
currency values such as major economic events and business performance of countries to make
sure their projects and operations in that location are profitable at the end of the day as
degradation in the value of foreign currencies can lead to less profits over international trading
assignments and lower margins on beverage and spirit sales.
Another major part of IFM is the element of political risk which governs the majority of
the firm's operation's in all its expanded locations as every place has their own ruling party and
their laws, regulations and restrictions can have a major effect on the financial condition of
MNC's like Diageo. The company has already undergone major turbulences which have
disrupted its international operations such as the COVID-19 pandemic which has had a
significant bearing on the firm's financial health as getting its sales banned in some markets and
major countries like U.S.A, India and UK going into constant lock-downs made Diageo write
down 1.3 Billion pounds in losses in 2020. Such reasons highlight the importance of
international financial management for the company.
IFM is a very complex field as the variables which are at play constantly change as the
international waters are very unpredictable and get easily manipulated on a daily basis which has
a major effect on the stocks of Diageo and the interest of its stakeholders. One of the most major
and widely used theories of IFM is the stakeholder theory which states that there must be
emphasis paid by businesses towards their stakeholders in order to build interpersonal
relationships (Chabi-Yo and Colacito, 2019). The stakeholders of a firm in the international
finance criteria mostly comprise of its customers, investors and people who own stakes in
Diageo through purchase of its financial instruments such as shares and these people must be
served the best way under any circumstance.
Upon further inspection of the concepts of the stakeholder theory in context of IFM,
there is key role identified on the dividends that a firm pays out to its shareholders which is a
apart of its earned profit. The way in which firms distribute the dividend is a major factors of
IFM as global happenings, the current currency changes and the political environment in which

Diageo conducts its operations affects its financial ability to consistently offer such amenities to
its stakeholders. The current dividend distribution policy which Diageo company follows is
segregated between ordinary and ADR shares. The dividend on normal shares is paid twice a
year where the interim part is offered in April and the final dividend in October with
approximate split being 40 and 60 and there is also an option given to shareholders to re-invest
their dividends to purchase even more shares to build trust and long term partnership with them
under the stakeholder theory (Dividend information, 2021). When it comes to ADR shares the
same two time dividend payment is involved along with re-investment options but the difference
is the amount is paid by Diageo in Sterling and then converted into dollars and redistributed to
shareholders with the help of its ADR depository in Citibank branches of America. ADR as an
instrument fluctuates a lot and is subject to currency rates which is why properly managing
dividend and financial matters internationally is paramount for Diageo to service its financial
stakeholders.
Another major proponent of international financial management is efficient market
hypothesis which is a theory which states that price reflects all information about a company,
alls tocks trade in regards to their fair value in exchanges and in general it means that
shareholders can only obtain higher returns through investment in risky avenues and instruments.
The operations of Diageo all have a critical bearing on this concept as the prices which the firm
charges on its products such as premium spirits and whiskeys along with the stock price and
share value can all be analysed to gain information by outside parties. Another major operational
performance of Diageo which is worth mentioning is that some aspects of its pricing in the
international financial markets have gone against the rules established by efficient market
hypothesis as long term shareholders have experienced up to 39% steady growth without any
risky investment.
The firm also celebrates capital market day where it has aimed to be a driver of
sustainable growth in the alcohol industry and increase its stock's growth rate for stakeholders by
targeting organic sales growth of up to 16% and organic movement of operating profit by a
similar margin. Diageo has succeeded for the most part as the company has remained profitable
despite being hit hard by COVID-19 and is on a road towards loss recovery while having its net
cash generating from operations increasing by a large margin. Stakeholder theory is also a force
behind the firm's operations as the earning per share has also increased and there is also a 4%

upward movement related to recommended dividend per share which are promising signs
(Annual Report, 2021, 2021).
Project appraisal refers to the detailed analysis which firms undertake to judge the
viability and overall prospects related to a proposed project before it is taken for execution with
main aim of selecting only viable projects. There are any ways to appraise a project and gain a
generic idea regarding its viability through technical analysis which highlights the scope,
technologies and procurement costs involved, financial analysis which works on metrics such as
total costing, NPV and CBR. Environmental appraisal is also gaining rapid speed as
governments around the world have been mobilising to take action against climate change.
Diageo majorly uses environmental appraisal along with technical analysis to judge projects as
the company has access to a vast amount of resources to undertake most projects. Its business
model is built entirety on sustainability which can be judged from its recent project which got
green lighted wherein Diageo has partnered with ecoSPIRITS to develop new sustainable
packaging solutions for its South Asian market (Diageo partners with ecoSPIRITS on new
circular packaging solution in Southeast Asia, 2021).
CONCLUSION
The above essay went into detail regarding the complexities involved in the application
of international financial management which is a major field of finance in today's business
landscape where international expansion is becoming fairly common. The essay went into detail
regarding the scope, definition of IFM along with the explanation of factors which made it
different from domestic financial management. The issues faced by multinational companies in
international markets and concepts such as stakeholder theory and efficient market hypotheses
were duly highlighted and the report was concluded with a brief explanation on the concept of
project appraisal along with the considerations that MNC's use for approving modern projects.

REFERENCES
Books and Journals
Arnold, G. and Lewis, D.S., 2019. Corporate financial management. Pearson UK.
Chabi-Yo, F. and Colacito, R., 2019. The term structures of coentropy in international financial
markets. Management Science, 65(8), pp.3541-3558.
Young, J.H. and Legister, A.P., 2018. Project-based learning in international financial
management. Journal of Teaching in International Business, 29(1), pp.76-87.
Online referencing
Annual Report, 2021, 2021 [online] available through
<https://www.diageo.com/en/investors/annual-report-2021/>
Diageo partners with ecoSPIRITS on new circular packaging solution in Southeast Asia, 2021
[online] available through <https://www.diageo.com/en/news-and-media/press-releases/diageo-
partners-with-ecospirits-on-new-circular-packaging-solution-in-southeast-asia/>
Dividend information, 2021 [online] available through
<https://www.diageo.com/en/investors/shareholder-centre/adr-shares/dividend-information/>