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Nestle: A dividend nest

Mar 12, 2009

In the previous article, we had discussed the application on Hero Honda, of a frame work through which one could achieve returns entirely from dividends. In this article we shall discuss the dividend record of Nestle and apply the same frame work to see whether it can be a dividend nest for investors. Nestle India is the Indian arm of Nestle SA, which holds a 62% stake in the company. It is one of the leading branded processed food companies in India with a large market share in products like instant coffee, weaning foods, instant foods, milk products, etc. Nestle has also established its presence in chocolates, confectioneries and other processed foods. Soluble beverages and milk products are the major contributors to Nestle's total sales. Some of Nestle's popular brands are Nescafe, Milkmaid, Maggi and Cerelac. The company has entered the chilled dairy segment with the launch of Nestle Dahi and Nestle Butter. Nestle has also made a foray in non-carbonated cold beverages segment through placement of Nestea iced tea and Nescafe Frappe vending machines.

The company has been continuously paying dividends to its shareholders for the last 20 years and has a marvelous track record of average dividend payout ratio which has been over 70%. This makes Nestle among the very few companies to maintain such a consistency.


Source: CMIE

The company had been able to grow its dividend per share at a CAGR of 15% in the last twenty years which in line with its earnings per share growth during the same period. Moreover, the company's dividend per share has grown at a 21% CAGR in the last 10 years. Its earnings per share clocked in a growth of 19% CAGR during the same period. This points out that the company had become more generous while rewarding its shareholders in this decade. Given this long history, there is very little chance that the company might stop paying dividends to its shareholders in the future.

At the current price level, the dividend yield for Nestle is around 3%. Assuming the company continues to grow its dividend per share at more than 20% per annum, the investor would be able to fetch 10% returns annually on his investment from dividends alone from the 6th year onwards. This can be backed by the fact that FMCG companies have very negligible capital expenditure requirements and most of them work on negative working capital. It may be also noted that Nestle currently has around Rs 4 bn of cash in its reserves. Also dividends are the only way with which Nestle can repatriate profits to its parent company.

Conclusion
Despite a low current dividend yield, the company's healthy cash reserves and sustained growth is likely to make Nestle a dividend earning vehicle for long term investors. However, investors should bear in mind that the above desired returns can be achieved only if one stays invested in the company from long term view. Moreover, it is important that management policies and environment in which company operates remains unchanged.


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