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Nestle (NSRGY) Dividend Stock Analysis

April 15, 2011 | About:
10qk

Dividend Growth Investor

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Nestle S.A. (NSRGY) provides nutrition, health, and wellness products worldwide. The company is a member of the international dividend achievers index, as it has managed to increase dividends every year since 1996. In addition to that, Nestle recently sold its majority stake in Alcon (ACL), which has enabled it to pursue a massive stock buyback strategy.

Main competitors behind Nestle include Kraft Foods (KFT) and General Mills (GIS).

US investors can purchase the ADR’s of Nestle, which are traded on the pink sheets under symbol NSRGY. (or NSRGY.PK at yahoo finance). The fact that this company is traded on the pink sheets, rather than NYSE, NASDAQ or AMEX should not scare potential investors. Nestle is a global blue chip, based in Switzerland, which has not only managed to increase earnings over the past decade, but also to share the wealth with shareholders in the form of increased dividends and consistent share buybacks.

Over the past decade this dividend stock has delivered a total return of 8.60% per year.



Since 2001, Nestle has managed to increase earnings per share in Swiss Franks by 7.60% per year. The consistent stock buybacks, where the company has spent 39 billion CHF since 2005, have also aided EPS growth.



Dividends per share in local currency have increased by 12.50% per year since 2001, which was higher than the growth in EPS. The main reason behind this faster growth in distributions was the expansion of the dividend payout ratio. The dividend is paid annually, as opposed to the quarterly schedule that US companies tend to follow for distribution payments. The latest dividend increase was announced in February 2011, when distributions were increased to $1.85 CHF ($1.96/share).



Over the past decade the dividend payout ratio has expanded to over 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.



The company has been able to generate strong organic growth in key areas such as North America, Europe and Asia through several factors. Some of them include product innovation, leveraging the company’s global scale, investing in building and maintaining the company’s strong brand positions worldwide. The company has 29 billionaire brands, which have delivered strong organic growth over the past few years as well. Nestle’s long term goal is to generate 5%-6% in annual organic sales growth, achieve sustainable improvement in EBIT and improving the trend in return on investment capital.

I own shares of Nestle. I would much rather own Nestle than Kraft (KFT) for example. I like the strong brands in the company's portfolio ( Purina is one of them). The food business is not a sexy growth business, but with the right strategy focusing on squeezing efficiencies across your value chain, expanding through innovation and strategic acquisitions, and buying back stock the company should be on track to meet its goals.

The company fits my entry criteria with its P/E of 10.90, yield of 3.20%, and with its sustainable distribution. I have recently added to my position in the stock.

Full disclosure: Long NSRGY

About the author:

Dividend Growth Investor
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.4/5 (8 votes)

Comments

McFlipp
McFlipp - 3 years ago
I fully agree with the article that Nestle is a great company and is truly creating shareholder value. Something which, as you mention, cannot be said of Kraft (selling pizza business to cheap and overpaying for cadbury) or Danone (using too much debt and keeps issuing more and more shares) for example.

So, Nestle is a great company, but is the price right? I don't think so. And I'm wondering where you get your numbers from, let me explain. I'm from The Netherlands so would just be buying the shares on the Swiss Exchange (already done it, but sold 'em recently, since I think they are overvalued) and I will therefor focus on share price, eps, etc. of the Swiss traded shares.

Current share price: CHF 54,05

L'Oreal stake in CHF per share as of 15-04-2011: CHF 5,68

Net debt in CHF per share (total debt - cash and cash equivalents): CHF 1,14

Earnings per share: CHF 2,60

Underlying earnings per share: CHF 3,32

P/E: (54,05 - 5,68 + 1,14)/2,60 = 19,04

P/E underlying: (54,05 - 5,68 + 1,14)/3,32 = 14,91

All data is per 31-12-2010 taken from the annual report (http://www.nestle.com/INVESTORS/REPORTS/Pages/Report-2010.aspx). The underlying earnings per share is a term coined by Nestle themselfs and basically takes out "one-off" items, restructuring etc. So I'm not taking that number very serious... Anyway I have included it for comparison sake.

So I get a cash/debt adjusted P/E of 19,04 or 14,91. I think this is at the top of the range one should be paying for such a large, not so fast growing company. I'd rather not pay for any growth in this case and only get in when I get a nice initial earnings yield, btw.

Now I'm wondering how you get to the 10,90 P/E and the 3,20% yield (yield on Swiss shares is 3,42%). Could you please elaborate on that?

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