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Nestlé: diversified brand power

The group offers diversified revenues and attractive returns to shareholders
Nestlé: diversified brand power

The coronavirus crisis has dramatically changed the way we eat and drink. Life under lockdown has shuttered restaurants, cafés and bars – effectively turning ‘last orders’ into orders to stay at home. But at the same time the pandemic has spurred an escalation in grocery shopping activity – compelling people to cook meals within the confines of their own four walls. And that escalation has been positive news for Nestlé (SWX:NES). Indeed, the Swiss consumer goods giant reported a 4.3 per cent increase in organic revenues for the three months to March – exceeding analysts’ expectations.

IC TIP: Buy at 104CHF
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Excellent brand power
Diversified revenues
Tapping into developing food trends
Attractive dividend and buyback programmes

Bear points

Out-of-home product range hit by Covid-19
Consumers may trade down amid a global recession

True, Nestlé does have exposure to some of the worst affected parts of food retail – namely within its ‘professional’ restaurant business, its water division and its ‘Nespresso’ coffee boutiques, as well as confectionery and ice cream. But first-quarter sales declines in these areas were more than offset by strong demand for the group’s ‘essential products’, including prepared meals, cooking aids and the Purina PetCare range.

It helps that Nestlé owns more than 2,000 brands, including big names such as Felix cat food, KitKat chocolate bars, Quality Street sweets and Nescafe instant coffee. The sheer size of that empire means that Nestlé is very well diversified; an attractive quality in normal circumstances, but particularly so in such uncertain and challenging times. What’s more, while 26 per cent of Nestlé’s portfolio constitutes premium goods, the rest pertains to mainstream products. This should help protect the group from the risk of hard-pressed consumers trading down from top-end brands.

Nestlé is diversified geographically, too. While its largest region by revenues is the Americas, the group sells into 187 countries in total. Developed markets were the main engine of growth for the first quarter, with a 7.4 per cent uptick in organic sales, but emerging markets still edged up very slightly. Meanwhile, the group has also shown versatility in its methods of reaching customers. Out-of-home sales contracted during lockdown, but Nestlé’s e-commerce revenues rocketed by 29.4 per cent – exceeding a tenth of total sales for the first time ever.

Today’s portfolio is a product of a judicious approach to acquisitions and divestments, under the watchful eye of chief executive Mark Schneider. Since his appointment at the start of 2017, there have been more than 50 transactions and reviews, allowing it to focus specifically on the categories of nutrition, health and ‘wellness’. This has helped reinvigorate organic growth following several sluggish years to 2018. It has also helped push the group's impressive returns higher (see chart below).

This has helped Nestlé tap into fast-developing trends. For example, its decision to purchase plant-based food company Sweet Earth in 2017. In the US alone, plant-based food sales are said to have reached a whopping $5bn in 2019 – up by 29 per cent over the previous two years. But the group has also made sizeable disposals, such as the sale of its US ice-cream business for a cool $4bn (£3.2bn) at the start of the year.

And earlier this month, Nestlé announced plans to “sharpen” its focus in the water market and make it carbon neutral by 2025. This could include the sale of the North American business, which accounts for CHF3.4bn of the division's CHF7.8bn revenue.

Nestlé S.A. (SWX:NESN)    
ORD PRICE:10,354ȼMARKET VALUE:CHF298bn  
TOUCH:10,353-10,355ȼ12-MONTH HIGH:11,320ȼLOW:8,337ȼ
FORWARD DIVIDEND YIELD:3.0%FORWARD PE RATIO:22  
NET ASSET VALUE:1,835ȼ*NET DEBT:51%**  
Year to 31 DecTurnover (CHFbn)Pre-tax profit (CHFbn)***Earnings per share (ȼ)***Dividend per share (ȼ) 
201789.914.1354245 
201891.814.8402245 
201992.615.2441270 
2020***85.614.4428285 
2021***87.715.1466310 
% change+2+5+9+9 
Beta:0.12
*Includes intangible assets of CHF47bn or 1,622CHF a share
**Includes lease liabilities of CHF3.4bn
***Berenberg forecasts, adjusted PTP and EPS figures
£1=CHF1.3