Friday, May 25, 2012

Stock Analysis of Nestle

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.
A large spike in earnings per share in 2010 was caused by the sale of Alcon to Roche. 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

Relevant Articles:

- How to invest in dividend stocks

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1 comment:

  1. Alcon was sold to Novartis, not Roche.

    ReplyDelete

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