Nestle: The Only Must Own Stock Outside The United States

For the most part, you could live your entire life by only purchasing stocks headquartered in the United States without sacrificing anything in the process by avoiding international securities. Feel the need for Anheuser-Busch or Heineken? You’ll do just fine or better owning Brown Forman. Feel the need to own BP or Royal Dutch Shell? Things can work out awfully swell for you if you stuff your portfolio with Exxon, Conoco, and Chevron. Want to own GlaxoSmithKline? You can take care of business by owning Johnson & Johnson.

None of this is meant to rag on those international firms. They are excellent. As part of a conservative portfolio aimed at building and preserving wealth, they are excellent stocks for consideration in such a portfolio. My point, rather, is that for someone building a portfolio of 25 stocks with the intent of truly holding them undisturbed for 25+ years, you could receive comparable returns just by focusing on the American versions without sacrificing much of anything either in terms of growth or quality.

There is one company that is an exception: Swiss-based Nestle. It is probably the one company that is not located in the United States that rises to the point of being indispensable. It is of slightly higher quality than what you could get in the United States through Kraft or General Mills (although both of those companies are lifetime holdings in their own right) and offers a higher long-term growth rate because it has a more decentralized business model, has better management, and higher returns on equity that lead to better long-term wealth creation.

People don’t want to deal with surrendering part of their dividend to taxes if held in a retirement account, and they don’t want to deal with the fuss of tax credits of held in a regular taxable brokerage account. Those concerns are understandable, but it is causing those types of investors to miss out on owning one of the five best businesses in the entire world. It’s truly one of the few dozen places where you can say things like “I’m going to hold this stock for the rest of my life and do what I want with the dividends, then pass it on to my kid, and then hope she passes it on to her kids as well.” Do a search of all the products owned by Nestle, and you’ll see what I mean.

The dividend is only paid out annually, and due to currency conversions, doesn’t always go up, and this deters a lot of American investors from owning a great business.

You can see Nestle’s ADR dividend history here.

It is easy to get caught up in the peculiarities of the dividend—the fact that it is annual instead of quarterly, doesn’t grow linearly but does grow consistently if you think in rolling five year periods, and involves slightly more tax complexity than what you’d get from your plain vanilla American holdings—but the problem is that you miss on great wealth creation.

By 1991, it was the largest European foodmaker. It was no secret to anyone that Nestle was a dominant business that would be around for a long, long time to come.

Someone who sunk $25,000 into Nestle in 1991 would own shares worth $246,000 and have received $146,000 in total dividends. In exchange for letting your investment grow quietly for over two decades, you got to collect in cash over six times the amount of money you originally set aside to buy the stock. You could use the value of the stock to buy a nice house. The value of everything put together is rapidly approaching $400,000, making Nestle an investment that has increased your wealth 16x over the past two decades.

If you put it all back into Nestle, the results get even wilder. You’d have almost 5,200 shares of Nestle. In 2014, Nestle paid out a dividend of $2.42 per share. You would have received $12,584 in cash from your Nestle dividends alone this year, putting you across the 50% yield-on-cost mark. Half of the cash you set aside in 1991 would be sent your way as just a share of 2014’s cash profits. If you were still reinvesting, imagine the wealth machine you’d have steamrolling ahead, rolling into freshly created shares that would make your dividend check even larger next year.

This is why I like to focus on substance over the procedural. If you are interested in long-term investing, nothing is more important than getting the company right. Who wants to see quarterly dividend checks get reinvested into Wachovia year after year, only to see years—decades!—of hard work all disappear in the abyss of the financial crisis in 2008. If you park long-term capital into Nestle, there’s no question that you are getting the company right. I would hate to see someone buy a stock with a higher starting yield, a slightly less complex tax situation, or quarterly dividend payments, only to see that other company experience financial difficulties ten to fifteen years down the line. Nestle is so good at long-term growth, and of such high quality, that it is worth dealing with some moderate estate planning inconveniences when you step back and realize that it is going to be here half-a-century later chugging out dividends for its owners.

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11 thoughts on “Nestle: The Only Must Own Stock Outside The United States

  1. scchan_2009 says:

    Good article, I love international stock.

    They are plenty of other top-class non-American consumer companies that can make great investments: Danone, Henkel, Kao, L’Oreal, Reckitt Benckiser, and Unilever (sorted in alphabetical order). The world is big, and there are plenty of opportunities abroad. All of these companies are global multinationals (just like Nestle or P&G), so investors should not be afraid of exchange rate risks. In fact, it ecks me if a CEO spend more time talking about foreign exchange derivative hedges than their international business 😉

  2. jsarnow says:

    Tim,
    Your articles are always thought provoking. The question I have, however, is whether the stocks that you write about are STILL a compelling buy. “If I had bought Nestles 20 years ago, I would be wealthy.” Are the stocks you write about STILL those for serious consideration, or are they the big 24 point buck that got away?
    John S.

  3. Jonnydee83 says:

    Tim, are there any special considerations when buying a foreign stock like nestle? Is there a certain type of share that an American investor should purchase?

  4. Seviay31 says:

    jsarnow JSA, people have probably been asking the same question about some of the great investments of the past 20 years, for the past 20 years.  Things like JNJ, KO, MMM, MO (the parent company of PM, MO, KRFT, MDLZ), CL, PG, and many other stellar performers.  Many of the companies that were great performers 40 years ago (or 60 years, or 80 years) were also great performers 20 years ago, and will be great performers today.  Due to the law of large numbers, I doubt if you can compound some of these very large stocks at 20% a year, but even if you “only” compound at 10-12%, you’re doing quite well for yourself.  Tim and others have written wonderful articles in the past to the effect of “what if you bought X stock at its peak in 1999 or 2000” and you still could have come out okay, especially if you reinvested dividends.  Perhaps he can provide the link to those articles.  I found them to be quite insightful

  5. KeithX says:

    Tim,
    I believe that the Swiss with holding is 35% of the dividends.  That can make a substantial difference over the long term and significantly reduced the returns.
    Thanks,
    KeithX

  6. Seviay31 says:

    KeithX you can reclaim them at tax time, assuming they are in a taxable account, as he noted / alluded to in his post.  I believe it is form 86, but check with the IRS site (irs.gov) or your tax professional

  7. KeithX says:

    Seviay31
    With holdings affect the dividends, especially if reinvested.  The $146K Tim wrote about gets cut to $95K.  You could add funds to cover the lost dividends, but they would get charged a commission.  I held NSRGY in the 1990s, but sold because the shares were in a 401k and the taxes were just lost, plain and simple.  Tim is correct that this is one great company, and that the shares are better off in taxable account, but the compounding affect is dampened by the with holdings.
    Thanks,
    KeithX

  8. Seviay31 says:

    KeithX great point, Keith.  I imagine that many of the DGI crowd have large enough positions in their stocks that they take dividends in cash to redeploy elsewhere, but having to pay the tax immediately and choose whether to reinvest in NSRGY or elsewhere definitely cuts into your compounding.  I had never thought about that, so thank you for sharing your experience.
    I had TEVA in a Roth a while back until I realized that I was just losing out on the taxed amount…what a pity, because the stock was so cheap at the time.  Oh well.
    As for NSRGY, I would happily hold it in a taxable account and collect the dividends in cash to fund IRA contributions or just reinvest into Nestle, even if it is a bit of a headache.  Their stable of brands is just too strong not to appreciate…and the stock is approaching a level I wouldn’t mind getting in. 
    Cheers,
    Sev

  9. scchan_2009 says:

    Seviay31 KeithX Somewhat off topic, but I am somewhat cautious holding individual stocks in a retirement account unless the amount of money and contributions are reasonably large. I would prefer a single ETF or even a mutual fund because when you start buying individual stocks, the trading fees are going to multiply.

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