Nestlé (VTX:NESN)

Nestlé is one of the world's leading food companies. It produces and markets a wide range of products and beverages for human and animal consumption. It aims to be one of the leading innovators in this field in Europe, with Nescafé instant coffee, Bolino freeze-dried meals and frozen foods. Its head office is located in Vevey, Switzerland. Since its inception, its logo has been a nest (nest in German/English) occupied by three, then two (to remain representative of the average family) small birds fed by an adult.

Nestlé owns several consumer brands such as Nescafe, Kit-Kat and Nestle Waters. It competes with companies such as Unilever, Hershey Foods, Kraft Foods, Cadbury Schweppes, and the DANONE GROUP. With only 42% of its food and beverage sales in North America, Nestlé is one of the most geographically diversified companies in its sector.. 

Although it already ranks first in terms of sales, Nestlé is trying to continue sales and margin growth by increasing the nutritional value of its products and expanding into new areas of therapeutic foods for people with various diseases. The stated goal is to transform the company from a food manufacturer into a world leader in nutrition, health and wellness. In 2010, Nestlé created a subsidiary that will create products to prevent and treat various conditions such as heart disease and diabetes.

Nestlé is divided into eight units, at least four of which contributed more than 10% to annual sales. This not only speaks to the company's diverse interests, but also to its strength in each of the respective markets. 

Beverages (18% of sales for the financial year 2010)

The sector drinks is the second largest after that of pDairy, Ice Cream and Nutrition Products. Nestlé owns several international beverage brands, including Nescafe, Nesquik, Nestea And Nestle Waters, each of which generated more than 1 billion francs in 2007. With more than 400 factories worldwide, Nestlé is able to adapt each product to local tastes. Nescafé in Switzerland, for example, has a different recipe than in the United States.Nestlé's recognition as a strong brand helps it compete with other brands such as Maxwell House, Lipton, And Evian.

Dairy, Nutrition, and Ice Cream (18.7% of sales for fiscal year 2010)

Dairy, Nutrition and Ice Cream is Nestlé's largest segment. Their nutritional products include the brand Gerber for babies and yogurts from the Nestlé brand. The pNestlé's nutritional products compete with brands such as Danone. 

Prepared meals and cooking (16% of sales for the 2010 financial year)

Nestle prepared meals and cooking consists mainly of products that are designed to be ready to consume very quickly. Nestlé owns well-known brands such as Maggi. 

Confectionery (11% of sales for the financial year 2010)

The segment of Confectionery includes brands like Kit-Kat And Nestle Crunch.

Other Food and Beverages (9.5% of turnover for the financial year 2010)

This group consists of "Nespresso", “Nestlé Professional”, and “Cereal Partners Worldwide”. Cereal Partners Worldwide has operations in more than 130 countries and accounts for approximately 25% of all cereal sales outside the United States and Canada. 

Pet Care (9.3% of turnover for the financial year 2010)

Nestlé Pet Care Group contributed 12% of the company's total turnover in 2009. Nestlé owns several pet care brands that generated more than CHF 1 billion in 2007 such as Purina, Dog Chow, And Friskies. In 2009, Pet Care generated revenues of 12.9 billion Swiss francs with organic growth of 7.9% compared to 2008. In particular, Purina outperformed other brands in its market with double-digit growth.

Pharmaceutical products (0.7% of sales for the financial year 2010)

Nestle Pharmaceutical products consists of pharmaceutical and cosmetic brands. Nestlé holds 30% of L'Oreal and recently sold its majority stake in Novartis to Alcon Inc, a manufacturer of eye care products. Nestlé also participates in two joint ventures with L'Oreal : Galderma And Innéov Laboratories. Galderma produces acne medication Differin and Innéov Laboratories produce several cosmetic products related to nutritional supplements. 

Health Nutrition

With funds from its sale of Alcon In 2010, Nestlé created the Nestlé Health Science company. This subsidiary will create foods intended to prevent and treat various heart diseases and diabetes. The company will also oversee the Nestlé Institute of Health Sciences which undertakes research aimed at bridging the gap between pharmaceuticals and food. 

Key Trends and Forces

The price of foods such as corn, wheat And dairy products may change due to factors such as weather and demand from other industries. Nestlé's ability to pass these cost increases on to consumers will play a large role in its ability to maintain its ongoing profit margins. Commodity prices have not yet stabilized and will continue to rise. The company has been gradually increasing prices since 2005, following the rise of raw materials, but it has also reduced the cost of packaging, increased its efficiency, and introduced high-end products with higher prices. 

Demanding consumers

Almost all of Nestlé's revenue comes from sales of food and beverage products. Thus, changing consumer demand for different types of foods and beverages may impact Nestlé's sales. These changes may for example be seasonal, with consumers tending to demand more hot drinks such as coffee during the cold winter months.Long-term trends also affect consumer demand. For example, the National Restaurant Association says consumers are demanding healthier food choices when dining out, reflecting the broader trend of growing public concern for overall health and well-being.

A strong Swiss franc 

Almost all of Nestlé's sales occur outside Switzerland, but the company reports its revenues in CHF . As such, changes in the exchange rate between the Swiss franc and other currencies can affect Nestlé's revenues. When currencies depreciate against the CHF, all transactions denominated in the currencies will be converted into a reduced number of francs, which means less revenue for Nestlé. The reverse is also true, with a weak franc boosting Nestlé's international sales. To help minimize the effect of fluctuating exchange rates, Nestlé purchases currency futures, swaps, forwards and options. We will see below that this policy is bearing fruit.

Nestlé must capture growth in emerging markets

Recognizing the importance of emerging markets, Nestlé is investing heavily in production capacity in new markets, such as South Africa, Brazil, Russia and India. Nestlé expects emerging markets to account for 60% of future growth. In addition, the company presented its "popularly priced products." These low-cost products are sold to consumers in developing countries. With theWith the explicit objective that sales from emerging markets will represent 45% of turnover in 2020, Nestlé is investing heavily in Brazil, Russia and India. The company has also expanded its manufacturing facilities in Africa, with new plants in Kenya, Zimbabwe, Angola, Mozambique and other countries. The company plans to increase sales of locally manufactured products in Africa to 52% in 2012 and 76% in 2016.

Dividends

THE long term average return is attractive with 3.30%. There average annual dividend growth is supported, with 14,38%. Nestlé has increased its shareholders' pocket money for 16 consecutive years. The distribution ratio, with 11.74% leaves plenty of room for future dividend increases, even if profits decline.

Course

Volatility, at 18.77%, is surprisingly high for a defensive SMI stock. On the other hand, the stock beats its benchmark over the long term.

Nestlé's geographical diversification, particularly its investments in emerging countries, as well as the use of financial tools to hedge against exchange rate effects, enable it to freeing oneself from the strength of the Swiss franc. Thus, we see that a rise in the CHF against the dollar is still accompanied in principle by a rise in the share price in CHF ($risk=-0.86).

In view of the above, with good coverage against currency risk, a generous yield accompanied by a low distribution ratio, sustained dividend growth, but fairly high volatility and a relative youth of growing dividends, we consider Nestlé to be a stock to monitor or keep.