Regarding Nestle stock, I wonder if I confuse “because of” with “in spite of.” In the past, I’ve written about how Nestle is one of the top businesses in the world, and is an exceptional treat investors because it nearly always trades in close proximity to its fair value range. Some businesses, like Emerson Electric and Cisco and Aflac, are especially reliant on the question “At what price did you buy it?” Others, like Colgate-Palmolive or Berkshire Hathaway or Nestle, are much more responsive to the question “Well, how long have you held it?”
Considering that other food companies, like Kellogg and Smucker, tend to get overvalued during investor “flights to safety”, you may wonder why Nestle is nearly always a fair deal for investors at nearly any given time.
Today, investors that purchased their Nestle stock through the CitiBank-facilitated stock offering received their dividend today–if you’re an ADR holder, as is customary for American investors, then you will collect $2.3197 per share by midnight tonight (or first thing Monday at some brokerages). It’s the best diversified food conglomerate in the world, with twenty-nine brands that generate over a billion francs in annual sales (that’s the equivalent to $1.1 billion).
There are over 2,000 brands owned by Nestle SA, and the sector breakdown is roughly as follows: powdered and non-liquid beverages generate $19.2 billion in sales, and $4.1 billion in profit (as you can see, this is very lucrative and accounts for 21.3% of the Nestle’s overall profits). It sells $7 billion worth of water that make up over $700 million in annual profits–this is 11.2% of Nestle’s overall profits. Milk products and ice cream account for $14.6 billion in annual sales, and $2.4 billion in profit. That is 16.9% of overall profits. Nutrition products and health foods account for $14.8 billion in annual sales, and $2.9 billion in annual profit. Prepared dinners account for$12.5 billion in sales, and $1.7 billion in net profits, or 13.7% of the overall picture.That amounts to 19.6% of Nestle’s bottom line. Chocolates, sugar cookies, and all the other confectionary lines amount to $8.8 billion in annual sales, and add $1.2 billion to the bottom line (14% of overall profits).
If you wanted a very broad-based understand of where that $2.31 per share Nestle dividend comes from, it would look like this: about $0.54 comes from selling coffee and other non-water beverages, $0.46 comes from selling healthy foods, $0.40 comes from selling ice cream and milk, $0.33 comes from selling chocolate and biscuits and cookies, $0.32 comes from selling frozen dinners and cooking aids, and $0.26 comes from selling water. Perhaps due to management risk it would be improper to analogize any specific company to a no-fee mutual fund, but Nestle belongs to that class which includes Procter & Gamble, Coca-Cola, PepsiCo, General Electric, Procter & Gamble, Johnson & Johnson, ExxonMobil, and Berkshire Hathaway where the stock singlehandedly represents what you’d get from buying a dozen mid-caps in the sector.
Despite selling products that everyone knows, and despite offering a nearly free DRIP program that permits anyone to build a large position in Nestle stock over time, and despite generating over 13% annual returns for the last half-century, it receives very little attention from the dividend community. I imagine this is the result of three things: (1) the dividend only gets paid out annually instead of quarterly; (2) the dividend is declared in Swiss francs and is then translated to the U.S. dollar, so there is bumpiness in the dividend amounts independent of what the Nestle Board of Directors declare as the payout; and (3) the U.S.-Switzerland tax treaty does not cover IRA accounts so that American investors forfeit a third of their Nestle dividends in most tax-deferred accounts and have to file paperwork to claim a tax credit if they own Nestle in a taxable account.
I consider these factors to be almost blessings in disguise, as they deter people from bidding up the shares of Nestle to be perpetually overvalued like you see with other top-tier stocks in the United States. Although quarterly cash payments do compound a bit more frequently than annual payouts, it doesn’t even add 0.1% to the overall compounding picture for reinvestors unless the average stock price at the other three contemplated dividend dates is much, much cheaper than the price on the annual payment’s reinvestment date.
On the translation from Swiss francs to U.S. dollars, I regard that as something that evens out over time in the case of a business like Nestle. Some years, your dividend hike will be lower than what the fundamentals of Nestle suggest. Other years, it will be higher. A few cents per share during any given comparison period is utterly inconsequential when considered in light of the long-term march upward. Who cares if the strength of the U.S. dollar has downticked the Nestle dividend from $2.42 in 2014 to $2.31 today? The important point is that the $1.15 dividend from 2008 is now doubled.
Regarding the taxes–yeah, if you could get Smucker (SJM) at $100 per share in a retirement account compared to Nestle at $73, I understand why it would be superior to do the former rather than the latter. But I think that the tax complication partially explains why it is possible to get a fair price on Nestle stock–if the tax treatment for Nestle stock was the same as Coca-Cola, you might be purchasing shares in the $80s instead of the $73 mark. Even if someone fumbled the tax portion of the Nestle holding–either putting Nestle in an IRA or not filling out the dividend reimbursement form in a taxable account–Nestle still has delivered a net compounding rate of over 12% annually since 1992. You still got to turn $10,000 into $170,000 for literally doing nothing except waiting out 24 years. Do that five or six times in your life, and you’re set.
If you do it right, and own a bit of Nestle in a taxable account and file the annual paperwork, the results can be impressive. In the past eight years, an ADR share of Nestle bought at $35 has paid out $17.10 in dividends (inclusive of today’s $2.31 payout). You got almost nearly half of your Nestle dividend investment back in the form of cash profits, which is incredibly since Nestle is the bluest of blue chips and gargantuan in size as it approaches $100 billion in annual sales. You bought and held one of the few nearly riskless corporations in the world, and you still got a whole lot of cash coming your way.
If you did manage to reinvest the annual payout, you would have collected $21.32 through today and reinvested at an average price of $53.01. Each share would have produced an additional 0.4 shares. If you bought 500 shares of Nestle in mid-2008 for $35, for an initial investment of $17,500, you were collecting $575 in first year dividends. It doesn’t seem like that much cash–about what you would expect from a stodgy company that is generally prized for its safety more so than its growth characteristics.
Well, as of today, you would have 700 shares valued at $73, or $51,100. Your share could would have climbed to 700 today by reinvesting the $1,617 dividend payment. If next year’s projections for a $2.42 payout hold true, someone shifting from reinvesting to living off income would be collecting just shy of $1,700 next May. In just eight years, you would be fast collecting a 10% annual payout from your initial investment amount. That’s the definition of a beautiful risk-adjusted return. You took minimal stock market risk, and yet, you got to start collecting a meaningful amount of money in a relatively short period of time from one of the most dominant businesses on the globe.
Personally, I think there is something a little bit charming about a high-quality holding that gives its owners a large chunk of cash as their share of profits from the preceding twelve months. For every 432 shares of Nestle that you get your hands on, you get a thousand bucks in May. The stock is perpetually underrated because of the additional tax hassle, but it does provide an ongoing benefit: The opportunity to almost always buy the stock at a fair price, which is very advantageous for those of you that expect to reinvest for a while because it means that you won’t have to put up with the suboptimal compounding periods that is inherent among popular stocks that get a bit pricey from time to time. And even if you do accept suboptimal compounding with Nestle by taking a tax inefficient approach to your holding? It still compounded at 12% since 1992 even if you chopped off a third of the dividend, which is a reminder that relatively annoying conditions shouldn’t deter you from making a decision that is still objectively great.
Originally posted 2016-05-20 20:35:04.