Nestle: A Sweet Idea

10/06/2015 10:00 am EST

Focus: STOCKS

Adrian Day

Chairman and CEO, Adrian Day Asset Management

This diversified food company, in everything from water to ice cream, nutrition to pet food, is one of the world’s great blue chips, asserts Adrian Day, editor of Global Analyst.

Nestle (NESN:SIX) is truly global, with factories in nearly 200 countries and selling virtually everywhere.

Some 40% of its sales are from the Americas, 25% from Europe, and the rest a growing share from emerging markets.

Some stocks do not require a lot of watching...and this is one of them. Nestle has a clean balance sheet, though debt has risen in recent years to now 30% of equity.

Revenue can vary with movement in the Swiss franc, in which Nestle reports. But earnings have tended to be more stable, with slow and steady growth; they have more than doubled since 2000.

For the past decade, it has increased its dividend each year, from 80 centimes in 2005 to Sfr 2.20 this year.

Acquisitions and dispositions improve profitability. Nestle, like other major food companies, is constantly making acquisition, large and small, as well as divesting brands that no longer fit.

Part of the process includes a focus on underperforming brands. Right now, for example, it is paying attention to its frozen-foods business in the US; Nestle’s is the largest such business in the US.

A leading brand in this segment is Lean Cuisine, where sales have been steadily declining as consumer’s turn away from processed foods.

Nestle has responded with a new look, and improved the taste and nutrition of the items, with less of a focus purely on calorie count. In addition, Nestle has long sought—and achieved—organic growth.

Recently, it has been able to exhibit strong pricing power and it expects margins to continue to expand.

Returns have consistently been strong and have improved in recent years, with ROE at 22% and ROA in the low double-digits. Following a recent stock price rebound, Nestle currently yields 3.12%, slightly above its long-term average.

This is a stock that belongs in every portfolio. For long-term investors without the stock, this is a good time to accumulate, though we may see lower prices in global stocks continue to suffer.

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