Nestle - Solid Q1 Revenue Growth For This Consumer Staples Giant

| About: Nestle S.A. (NSRGY)

Summary

Nestle put in a solid Sales Performance in Q1 2016.

Nestle achieved 3% Growth by Volume and 1% Growth by Price.

Despite an expensive Swiss Franc.

Nestle pays a 3.1% Dividend with a 57 year payment streak.

Introduction

I recently just became a shareholder of Nestle (OTCPK:NSRGY). I am a huge fan of consumer staples stocks for their diversified revenue streams, powerful brands, customer loyalty, decent margins, low capex requirements and earnings durability. The challenge these days is finding a consumer staples giant at a fair price, never mind at value.

My favorite valuation metric for finding investment research candidates is Free Cash Flow (FCF) as a Proportion of Enterprise Value (EV) or what I call FCF Yield. I like this metric because:

  1. FCF are the Operational Cash Proceeds that are left over after the business has invested in itself. Well-run companies, in my opinion, should be able to meet their debt and shareholder needs from FCFs.
  2. Enterprise Value = Market Cap + Net Debt. This means that companies that take on debt will have a bigger EV than Market Cap. Thus companies that take on debt have relatively lower FCF yields.
  3. I am ultimately a total return investor but I like dividends too so long as they are well covered by Free Cashflows.

I ran my screen on a number of well-know Consumer Staple names and here the results of the screen.

Name

Ticker

Mkt Cap

EV

FCF

FCF/EV

Currency

Nestle

VTX:NESN

231.32

246.72

10.40

4.2%

CHF

Hershey

HSY

14.64

16.69

0.85

5.09%

USD

PG

PG

223.35

240.65

11.00

4.57%

USD

Unilever

UL

121.33

132.83

6.10

4.59%

EUR

Pepsi

PEP

152.48

173.78

7.80

4.49%

USD

Henkel

OTCPK:HENKY

40.63

39.81

1.76

4.42%

EUR

BATS

BTI

78.89

93.89

4.10

4.37%

GBP

Cranswick

LON:CWK

1.16

1.16

0.05

4.29%

GBP

InBev

BUD

204.00

246.50

9.50

3.85%

USD

General Mills

GIS

37.32

45.32

1.80

3.97%

USD

Coke

KO

200.69

224.69

8.00

3.56%

USD

L'Oreal

OTCPK:LRLCY

88.64

87.99

3.00

3.41%

EUR

Diageo

DEO

48.65

58.35

1.90

3.26%

GBP

Click to enlarge

Nestle is not selling at particularly great value but it offers great stability and churns out a durable dividend of 3.1%. My portfolio is full of many "value" plays and it needs a bit of stabilizing with a Nestle.

Furthermore, Nestle released its update on Q1 2016 Sales on Thursday 14th April. A review of the Q1 Sales Performance convinced me it was time to buy shares

The Nestle Q1 2016 Sales - It's mainly about the Volume Growth

When one initially looks at Sales performance for the quarter there does not seem much to get excited about. Sales came in at 20.9B CHF for both quarters. There was no Quarter-on-Quarter Sales Growth.

But one must keep in mind that the reporting currency, the Swiss Franc, is expensive. All those global sales happening in USD, GBP, CAD, AUD, YEN, YUAN, etc are buying less CHF when converted back for head office reporting purposes. The following chart shows the negative impact that FX had on Nestle regional sales.

Click to enlarge

Fundamental growth in Sales, however, is a function of Price and Volume. Long term investors should ideally not really speculate on short term currency fluctuations. In terms of fundamental Revenue Growth, Nestle delivered.

Click to enlarge

Looking at the above Nestle management slide, we see that Nestle delivered strongly in terms of volume growth (Nestle calls this Real Internal Growth) across the board: 3% Sales Growth by Volume overall. (All the blue in the chart is a good thing!)

The following chart helps readers get a better understanding of what regions the volume growth applied to.

Segment

Detail

Volume Growth

%age Q1 Sales

AMS

North and South Americas

2.70%

28%

EMENA

Europe, Middle East, Russia

3.10%

19%

AOA

Africa, Asia, India, Australis

1.70%

17%

Nestle Waters

Nestle Waters

5.80%

8%

Nestle Nutrition

Nestle Nutrition

2.20%

12%

Other

Other

4.50%

15%

Overall

Overall

3%

100%

Click to enlarge

Overall price growth of 1% is significant since it means that Nestle isn't cutting prices to achieve volume growth.

Nestle Management also broke out Volume/Price Growth metric by Product Group.

Click to enlarge

Again we see a lot of blue in the chart indicating the sources of Volume Growth at Nestle.

The Nestle Brands

Durability of earnings is founded on a highly diversified portfolio of high-margin brands that inspire repeat business via customer loyalty. Nestle has about 2,000 brands in its stable. Here's some of them.

Click to enlarge

Look carefully at the infographic and you will see that Nestle has several substantial beauty and fashion brands in its portfolio via its 23.29% shareholding in cosmetics giant, L'Oreal. L'Oreal, in turn, owns 9% of Sanofi which means that Nestle owns just over 2% of Sanofi!

Nestle is not just a consumer staples company, it is a little bit of a conglomerate too.

The Nestle Dividend and Total Return

Another good reason to own consumer staples is that the durable and steadily growing Free Cashflow streams result in durable and growing dividend payments. Nestle is no exception in this regard. The dividend streak goes all the way back to 1959. The dividend was frozen a dozen times over this 57-year streak.

The dividend is paid once per year in April. The recent 2.25CHF dividend was just paid April 11th 2016. So new investors will have to wait a whole year for the next dividend payment. The dividend yield is currently 3.1% off the 2.25CHF dividend.

The durability of the dividend should be a good proxy for durable earnings, free cashflows and total returns. The total return history of the Nestle ADR (source: longrundata) is as follows:

  • 19 Years 12.6% (earliest date on longrundata)
  • 15 Years 12%
  • 10 Years 13%
  • 5 Years 8.6%
  • 3 Years 5.8%
  • 1 Year -0.4%

Nestle has had poor total returns in the last few years but I am hopeful that this dynamic will change.

Conclusion

I want a consumer staples giant in my portfolio because of the diversified revenue and earnings streams that are unlikely to fall off a cliff. I am long stocks like Apple and Gilead and I am very mindful of their very concentrated revenue streams. I appreciate Nestle may only track the market in the short term but in the long term I expect this stock to find a little bit of alpha. Nestle is also battle tested over many decades. Its durability cannot really be questioned. Stocks like Apple and Gilead still need to answer the durability question if they wish to mature into the next generation of dividends aristocrats.

Whilst Nestle is not the best value consumer staples giant out there, it had a very decent quarter in terms of growing sales volumes.

A note to US investors

Nestle is a Swiss company. What does this mean for you?

  1. The Nestle ADR has an average trading volume of about 0.5M shares per day.
  2. The Nestle trading volume on its home exchange is over 7M shares per day.
  3. I would encourage US investors to trade on the Swiss Exchange in Swiss Francs
  4. The default Dividend Witholding Tax is 35%. US investors can in theory obtain a 15% withholding rate via tax treaty, but in practice this may be very hard to achieve.

Disclosure: I am/we are long NSRGY, HENKY, UL, BTI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.