Friday, June 1, 2012

Nestle (NSRGY): A Global Dividend Powerhouse

Nestlé S.A. (NSRGY), together with its subsidiaries, provides nutrition, health, and wellness products worldwide. This international dividend achiever has paid uninterrupted dividends on its common stock since for 16 years in a row.

The company’s last dividend increase was in 2012 when the Board of Directors approved a 5.40% increase 1.95 CHF/share. Nestle ‘s largest competitors include Kraft Foods (KFT), Danone (Danoy) and General Mills (GIS).

Over the past decade this dividend growth stock has delivered an annualized total return of 13.40% to its shareholders in US dollars. A large portion of the gain came from the appreciation of the Swiss franc from $0.60 in early 2002 to $1.10 in early 2012. 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.

The company has managed to deliver 7.60% in annual EPS growth since 2001.

Nestle is well positioned to ride the increasing affluence of emerging markets with its strong presence throughout the emerging markets. In fact, 40 % of the company’s sales came from emerging economies. Understanding local markets and strategic acquisitions will be the key to future success.

Another division that could drive future growth is Nestle Health Science division, which began operations in January 2011. This division is an attempt to pioneer a new market between food and pharmaceuticals and to develop science-based personalized nutrition solutions to chronic medical conditions.

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.

A large spike in earnings per share in 2010 was caused by the sale of Alcon to Novartis. I did not account for these one-time effects in this analysis.

The company has enjoyed a return on equity in the low to medium teens. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 12.50% per year over the past decade, which is higher than to the growth in EPS.

A 12% growth in distributions translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 1995 we see that Nestle has managed to double its dividend every five and a half years on average. The company pays dividends once per year. US shareholders typically get paid about one month after the company distributes the dividend to domestic investors, and also have 15% withheld at source. However, income investors can get a tax credit on their US tax returns at tax time. This is one reason why holding ADR’s in a taxable account makes sense.

Over the past decade, the dividend payout ratio has increased from 37% in 2001 to 56% in 2011. This was caused by the fact that dividend growth was faster than earnings growth. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Nestle is attractively valued at 19.20 times earnings, has a sustainable dividend payout and yields 3.50%. I would consider adding to my position subject to availability of funds.

Full Disclosure: Long NSRGY and KFT

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