Stock Analysis

Nestle Dividend – Is it worth buying the stock right now?

Nestle SA ($SWX:NESN) is the number 1 stock with the longest dividend growth streak in Europe and a proud member of the Noble 30 ⚔ index. Today I will share with you my quick analysis about the Nestle dividend and asses whether I find it an interesting stock to consider at the current share price.

Background

Nestle SA is a Swiss company founded in 1866. It is a food and drink conglomerate and part of the Consumer Staple sector. Within that sector it is currently the biggest company in the world by revenue. Its largest competitors are Proctor & Gamble and Unilever NV.

The uniqueness of Nestle becomes clear when looking at their brand portfolio. They currently own 34 brands which generate more than a billion in sales. Most of you will probably recognize them and some are listed in the below picture.

An interesting fact is that Nestle started a collaboration with Starbucks not too long ago. It will be interesting to see how that performs in the future and it’s starting to become visible in their sales (300 mln in 2019).

Having said that, In 2019 Nestle earned in total CHF 92.8 billion in revenue which was a growth of 1.2%. This is not uncommon for a relatively slow-growth company of such size.

Nestle Dividend Safety

Is Nestle dividend safe? That’s the main question that I want to answer as a dividend growth investor. Let me therefore explore several determining factors first and then get back to you with my answer.

Nestle Dividend history

Nestle SA has a strong dividend growth track record. It has grown its dividend since 1959 for 61 consecutive years. This is really unheard of in Europe and still 7 years more than Unilever.

However, the company hasn’t been knocking us out of park in the last 10 years with their dividend hikes. The average dividend growth ratio was a meager 3.85%.

Nestle dividend
Nestle Dividend History

Earnings / Cash Flow

The reason for the relatively slow dividend growth becomes obvious when looking at their past earnings. The below graph indicates that both Earnings and Cash Flow per share showed little to no growth over the last decade. At the same time their payout ratios have slightly increased to 63% based on last years earnings (68% based on cash flow).

Nestle Earnings and Cash Flow trends
EPS / Cash flow per share 2010 – 2019 -including payout ratios

Actually, it seems to be a prudent dividend growth when purely looking at those numbers. So let’s check then how the board of directors dealt with share buybacks which I consider another important wealth generator, if done well.

As you can see, Nestle has been buying back shares quite consistently, because they reduced their share count by ~13% since 2010.

shares outstanding trend
Nestle SA shares outstanding

Looking at this in combination with relatively no earnings per share growth tells me that we’re looking at a struggling business. A sneak peak at their income statement shows me that operating income was relatively flat.

So how have they been buying back those shares then? A high payout ratio would assume that there is not too much wiggle room left anymore for buying back shares.

Long term debt

I think this question is easily answered by looking at the below graph. While their EPS and Cash Flow per share stayed relatively flat, their long term debt has increased 3-fold!

Long Term debt trend
Nestle SA long term debt 2010-2019

To look at it from another angle, have a look at the following calculation based on 2019 figures:

Free cash flow:    11.639
Dividend paid:      7.230
Share buyback:      9.773

Result:            (5.364)

Clearly, this is where the debt is really going to.

Now, this is not something special by itself. Many companies are currently doing this due to the low-interest environment. It’s often simply just cheaper to retire shares instead of investing for innovation (which comes with risk).

Having said that, their long-term debt / equity currently stands at 44%. This is still prudent and they can still easily pay their interest on debt. Just keep in mind that the debt/equity ratio was 11% a decade ago, so the trend is not going into the right direction.

Actually, I believe that a further rapid growth in long term debt will put their investment ratings at risk.

Last but not least, Nestle SA share price doubled over the last decade. It tells me that this was mainly due to multiple expansion and coming from a relatively low basis. You can currently own Nestle at CHF 105 per share at a P/E of 24.5.

Covid-19 impact

The impact by the recent pandemic has actually been quite positive and they also kept their 2020 full-year guidance.

This should come as no surprise, because the consumer staple sector is really serving a basic need for people during the pandemic by being the main supplier of food, drinks and other necessities.

However, I don’t think that the pandemic related additional revenue is there to stay. I expect consumer behavior to slowly recover again which makes dining-out a competitor to Nestle’s sales.

Nestle Dividend – Final Thoughts & Recommendation

At the moment I see no catalyst for the company. This is why Nestle SA really needs to find its mojo back and focus more on innovating its portfolio to get back some organic growth. Maybe the Starbucks collaboration will bring some positive news here.

Currently one might consider Nestle SA just to be a bond equivalent. In that case I would personally prefer their long term to stay flat from now on.

Having said that, I believe that the dividend has slowly become less safer over the years.

Therefore, I am currently avoiding a position in Nestle.

I would even consider selling it if I owned it already.

I find their main competitor and #2 in the Noble 30 index, Unilever NV, is a much better holding for the next 10 to 20 years.

Quick Recap

Pro
✅ Consecutive dividend growth since 1959
✅ Balance sheet
✅ Collaboration with StarBucks

Con
⭕ Rapidly increasing LT debt
⭕ Share Buyback by issuing debt
⭕ Earnings / Cash Flow growth
⭕ Meager dividend growth
⭕ No real catalyst for organic growth
⭕ Share price growth due to multiple expansion


What do you think about Nestle? Do you own the stock or are you considering to initiate a position?

I’m curious to hear your thoughts!

Yours Truly

European Dividend Growth Investor

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de kleine kapitalist
3 months ago

Great post! I do not own or consider Nestle and would rank Unilever’s future growth perspectives much, much higher. I am curious what’s your opinion on tier 1 ranked stock and competitor Pepsi. For many investors this dividend aristocrat is an instant pick in the consumer staples sector. However, like Nestle, Pepsi is growing very slowly while profits are in decline for years now. They seem to be highly dependent on 1 region (North-America) and 1 retailer (Walmart). On the other hand, like Unilever, I support Pepsi’s sustainability agenda (way better than KO). But both Nestle and Pepsi are behind… Read more »

Mooi Dividend
3 months ago

Great analysis to read. I enjoy that you also take the long term debt development into consideration as this makes me realize that this is a weak point in my models. I only have the current solvability in my model and realize that debt trend is of added value.

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