Nestle (NSRGY), the largest food company in the world, continues to slice and dice, in an effort to shed underperforming or low margin businesses and pick up higher growth, higher margin opportunities.
Nestle has finished selling its last piece of Alcon, its eye-care business, to drug-maker Novartis (NVS). The sale of the 52% of the company that Nestle sold brought in $28.3 billion.
Nestle will use a substantial part of that to reduce the company’s debt, which stood at $29 billion at the end of June. That should maintain the company’s AA debt rating. (Some will also go to fund a plan to buy back about $10 billion in the company’s shares through 2011.)
Paying down debt doesn’t seem very exciting but it’s essential to the company’s strategy of buying growth opportunities in the nutrition, health, and wellness sectors of the food and beverage market. (A company has to clear room on its balance sheet to finance acquisitions either with cash or new debt) This year Nestle bought a frozen pizza business from Kraft, a United Kingdom nutrition company Vitaflo, and Mivina, a maker of instant noodles in the Ukraine. Expect more deals now that the Alcon sale is done.
Nestle is likely to face a tougher second half in 2010 thanks to rising prices of commodities such as cocoa and palm oil.
But the company finished the first half with good momentum. Revenue grew by 6% from the first half of 2009 including acquisitions and currency effects. (Subtract those and revenue growth came to 5%.) Sales in the Asia, Oceania, and Africa unit grew by 9% and by 6% in the Americas. Europe remained the laggard with just 2% revenue growth.
All the work rearranging the company’s portfolio of brands has paid off recently too. Operating margin climbed in the last 12 months to 13.9% from an average of 11.3% over the last decade.
The shares trade at a price-to-earnings ratio of 18. That’s a bit of a premium to the industry average of 17.2 but I think it’s justified by the strength of Nestlé’s brands.
Still the shares trade near their 52-week high and I’d like to get more of a discount. Anything near or below $48 would be a good price in my opinion. As of September 2, I’m adding the shares to Jim’s Watch List.
I’d rather it pays every quarter instead of waiting for a year to get my dividend.
Nestle does pay a yearly dividend that they have been increasing every year.
I am always chasing after Nestle and it is always beyond my reach as a value investor. However, it is not growing quickly and the absence of a dividend does not make me want to buy it at present levels. Maybe around 42.00.
I was going to agree with YX and suggest PM (my biggest single position) for anyone looking for the kind of exposure Nestle offers (consumer staples sold all over the world with most (all in PM’s case) revenues outside US.
But I compared their charts from March, 2008 when PM got spun off from MO and lo and behold, they’re remarkably identical.
Whether the charted returns (I used MSN’s charts) include reinvested dividends, I can’t say. PM pays a nice dividend every quarter like clock work.
But at least with PM you can get their financials on a million different sites. And it is a great play on a weakening dollar, if you think the dollar has nowhere to go but down.
A good company with very diversified products and demographic, however investing in the stock is quite another matter. I owned NSRGY probably last year. It was on pink sheet and hard to track its finances. Because information on pink sheet stocks are not widely available and reliable as other stocks. And it does not pay dividend as neatly as other food companies. If I was going to buy a consumer stable stock, I want it to pay dividend every quarter. It doesn’t. So I sold it.
Jim,
Good post on a good company. Nestle’s Boost nutrition drinks is just one of their many products, but Boost tastes better than their main competition Ensure (made by Abbott Labs) in my opinion, and has more amounts of nutrients per bottle. Anyhow, I have a good impression of Nestle’s products and have always wondered if it’s also a good stock to own, so thanks for the post.