Friday, April 15, 2011

Nestle (NSRGY) Dividend Stock Analysis

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

Relevant Articles:

- Coca-Cola (KO) Dividend Stock Analysis
- Kraft Foods freezes dividends
- PepsiCo (PEP) Dividend Stock Analysis
- Unilever (UL) Dividend Stock Analysis

12 comments:

  1. Hi DGI,

    thanks for your comprehensive analysis of Nestlé as a dividend stock. I also own shares of Nestlé.
    There is only one problem with Nestle's dividend: Swiss withholding tax, which is very high (for me as an Austrian citizen it's 35% + Austrian capital income tax of 10%, which leaves only 55% of the initial dividend in my pocket).
    Isn't this a problem you also face in the US?

    Keep on your great blog!
    Martin

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  2. Good question, Martin.
    I wanted to ask the same question.

    Regards
    ZaVodou

    ReplyDelete
  3. I was going to ask a similar question, is the yield quoted after or before the foreign tax usually withheld?

    ReplyDelete
  4. Thanks for a good post and an interesting blog. I think the PE of Nestle is higher. Earnings per share from continuing operations 2010 is 2,6 chf while "underlying" eps is 3,3. This gives a PE of 16 to 21.

    /swede who follows this blog regularly!

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  5. I put this in my watch list and forgot about it! Thanks for the reminder. I like the metrics on Nestle as well.

    ReplyDelete
  6. Martin,

    I am not familiar with Austrian tax system, but in the US you could take a credit against foreign taxes withheld from your dividend payment.

    That's why holding foreign dividend stocks in a retirement account might not make sense.

    ReplyDelete
  7. 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?

    ReplyDelete
  8. McFlipp,

    Nobody here didn´t mention one-time gain from selling Alcon stake to Novartis in 2010. Maybe that´s why DGI came up with p/e of 11 instead of 19. Otherwise i pretty much agree with your view of Nestlé. My personal entry point would be under 40 CHF but i don´t think i will have a chance to buy for that price in future.

    DGI,

    Otherwise nice article. I read all your articles so keep on good work.

    Regards, Regis.

    ReplyDelete
  9. Hi Regis,

    Good to see you pupping that number, as that is exactly my own entry point :)
    It traded for that early 2009, so it's definitely possible. And as Warren Buffett says sometimes you've gotta be able to sit on your hands for a long time.

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  10. Actually the P/E number i provided is wrong indeed. The EPS is at 3.32 CHF, which is $3.70 USD. At a price of $58.40 the P/E is 15.80.

    ReplyDelete
  11. Actually, US investors can buy this stock either OTC/ pink sheets OR directly on the Swiss exchange. US citizens are certainly allowed to buy directly on the Swiss exchange, and US brokerages such as Interactive Brokers (for example) facilitate this. It really all depends on your preference.

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  12. Hey DGI, I have been following your blog for over a year.. Just bought Nestle today.. Up to almost 10 individual stocks and a larger portfolio in ISAs..

    Curious, Do you have a list of your portfolio?

    ReplyDelete

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