Chapter 2

Cash and the Dividend

Pernod Ricard's free cash flow no longer covers its dividend. In FY2025 the group generated €1,133m of reported free cash flow and paid €1,201m in dividends; the payout is covered only against the "recurring" free-cash-flow figure the company reports (€1,348m) [1]. Leverage has since risen to 3.8x net-debt/EBITDA — the product of falling profit, not new borrowing [2]. The balance sheet is not fragile, but deleveraging now depends on the recovery the group is still waiting for.

Sources: net-debt/EBITDA, H1 FY2026 Sales and Results [3]; free cash flow, dividend and DPS, FY2025 URD §5.3 [4].

The coverage gap

The dividend has crossed above free cash flow, and the crossover is not new. Between FY2022 and FY2025 the annual cash cost of the dividend rose from €826m to roughly €1.2bn, while free cash flow fell from a FY2022 peak toward €1.1bn. The two lines met in FY2024 and have stayed close since.

Source: derived from reported financials, FY2022–FY2025; FY2024–FY2025 figures reconcile to the FY2025 URD net-debt table (reported FCF €963m and €1,133m; dividends €1,208m and €1,201m) [5].

The company's own reconciliation is the clearest way to see it. In FY2025, self-financing capacity before interest and tax was €3,101m; a €470m increase in working capital, €844m of interest and tax, and €655m of net capital spending reduced that to €1,133m of free cash flow [6]. Dividends paid were €1,201m [7]. The gap is small — about €68m — but it is a gap, and FY2024 was wider: €963m of free cash flow against €1,208m of dividends and a further €334m of share buybacks [8]. Over the two years, reported free cash flow of about €2.1bn funded roughly €2.4bn of dividends; the €0.3bn difference, plus buybacks, came from the balance sheet.

Coverage reappears only under the company's "recurring free cash flow" measure — €1,175m in FY2024 and €1,348m in FY2025 — which restates reported free cash flow for items management classifies as non-recurring [9]. That add-back is worth naming plainly. It was €212m in FY2024 and €215m in FY2025 [10], and it repeated at €94m and €113m in the two most recent half-years [11]. A cash cost of roughly €210m a year that recurs every year — largely restructuring and strategic one-offs [12] — sits uneasily under a "non-recurring" label, especially while the €1bn efficiency programme runs to FY2029. The dividend is covered by the cash flow the company asks you to normalise, not by the cash it actually generated.

Leverage is rising on the denominator

Net debt itself has been broadly stable. On the group's definition — gross debt including lease liabilities, less cash — it moved from €10,273m at June 2023 to €10,951m at June 2024, then back to €10,727m at June 2025, helped in the latest year by a €282m foreign-exchange translation benefit that did more than the €59m of underlying debt reduction [13]. By December 2025 it stood at €11,168m, a seasonal half-year build driven by the timing of the dividend [14].

Sources: FY2025 URD §5.3 (June 2023–June 2025) [15]; H1 FY2026 Change in Net Debt (December 2025) [16].

The leverage ratio tells a different story, because the denominator is shrinking. Net-debt/EBITDA rose from 3.3x at June 2025 to 3.8x at December 2025; the company's own bridge attributes 0.4x of the increase to lower EBITDA and cash generation and 0.1x to group structure and foreign exchange — none of it to fresh borrowing [17]. Set against the 2.6x the group carried in FY2021, before the boom, the trajectory is the mirror image of the sales story in After the Boom: as profit fell, the same debt became heavier [18]. This is why the ratio, not the debt, is the number to watch: a recovery in EBITDA would pull it down without a euro of repayment, and a prolonged trough would push it higher without a euro of new debt.

What keeps this from being a solvency question

Three things separate elevated leverage from real balance-sheet stress, and all three hold here.

First, the maturity wall is a ladder, not a cliff. The bond stack runs in roughly €1–1.8bn annual tranches out to 2050, with the nearest maturities a €600m note due May 2026 and a $600m note due June 2026 — together close to the €1.1bn of cash on the balance sheet [19].

Second, liquidity is ample and the debt is covenant-light. At June 2025 the group held €1,829m of cash plus €2,810m of confirmed, undrawn revolving credit facilities [20]. The bonds carry no financial-leverage covenants — no net-debt/EBITDA test that a downgrade or a weak year could trip [21].

Third, the assets behind the debt are real and slow-moving. Inventory stood at €8.4bn at June 2025 on the reported balance sheet, a large part of it maturing Scotch, cognac and other aged spirits that gain value as they age [22]. That stock is the working-capital drag — €470m in FY2025 [23] and €610m in the latest half-year [24] — but it is also a reservoir of cash that unwinds if the group lets inventory run down toward demand.

The genuine cost is quieter: interest. Net financing has climbed as low-coupon bonds issued in the 2019–2021 era mature and are refinanced at coupons of 3.25%–3.75% [25]; in FY2025 the cost of net financial debt included €313m of bond expense and €26m of commercial-paper cost [26], and reported interest expense has roughly doubled since FY2022 on the group's income statements. Each refinancing at today's rates takes another bite out of the free cash flow that already fails to cover the dividend.

The dividend decision, and what would change the read

Management has held the dividend at €4.70 per share, unchanged year-on-year and paid in two €2.35 instalments [27]. The stated policy is a payout of "circa 50% of net profit from recurring operations" [28]. With recurring profit falling — group share of net profit fell 18% in the first half of FY2026 and earnings per share fell 20% [29] — a frozen dividend means the effective payout ratio has drifted above the policy. At roughly €64 a share, the €4.70 payout is a yield near 7.4%, a level that usually signals the market doubts the distribution will hold.

The read here is that the dividend is defensible but no longer self-funding, and that the two-sided thesis from After the Boom resolves through this line more than any other. The deleveraging plan management describes — strategic capital spending normalising from its peak, working capital releasing, growth returning — is the cyclical case stated in cash-flow terms [30]. If it delivers, EBITDA recovers, the ratio falls back toward 3x on its own, and the €4.70 is comfortably re-covered by reported cash. If the downshift is structural, the recovery in the denominator does not come, the working-capital release is smaller, and a dividend that already exceeds reported free cash flow keeps leverage elevated — at which point the group faces the choice it has so far avoided between the payout and the balance sheet.

The strongest fact against the cautious read is that none of this is stress: covenant-light debt, €4.6bn of liquidity, and an inventory asset that converts to cash on demand give management years, not quarters, to be right about the cycle. What would change the read, in order of signal value: reported free cash flow returning durably above the ~€1.2bn dividend cost; the working-capital drag turning to a release; net-debt/EBITDA turning back down from 3.8x on its own second-half seasonality; and the "non-recurring" free-cash-flow add-back shrinking rather than repeating near €210m. The first of those to appear in a results statement is the one to trust.