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Nestle - stronger momentum helps profits rise

George Salmon | 14 February 2019 | A A A
Nestle - stronger momentum helps profits rise

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Nestle Sa Ordinary CHF0.01

Sell: 118.06 | Buy: 118.10 | Change 0.08 (0.07%)
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Nestle's 2018 sales rose 2.1% to 91.4bn Swiss Francs (CHF). After stripping out a 1.6% headwind from unfavourable currency movements and a 0.7% boost from net acquisitions, that represents growth of 3%.

The higher revenues, together with an ongoing share buyback and improved operating margins, helping adjusted earnings per share rise 13.9% to CHF 4.02, above prior analyst forecasts.

The shares rose 3.3% after the news.

The full year dividend is set to rise 10 centimes to CHF 2.45 per share.

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Our View

Nestle's first ever product was a child nutrition supplement - a sector that still accounts for 17.7% of its sales. Other staples like chocolate and Nescafe have joined the stable over the group's 152 year history, so it's very much a story of evolution, rather than revolution.

Consistency has been the watchword for the group's financials too. Nestle has delivered underlying sales growth of at least 2% for over 20 years with dividends increasing every year over that timeframe too. We think the group can continue the run, although sales growth has been a touch weaker in recent years.

The secret to success is a tried and tested formula of innovate, advertise and repeat.

A research and development spend of CHF 1.7bn gives the group plenty of firepower to create new brands, products and varieties. Once these innovations are established, the marketing and admin budget of over CHF 20bn ensures they're front and centre of consumers' minds.

That helps generate extra sales and boosts higher profits. Profits which can be paid out as dividends and reinvested in next year's products. The cycle can start again.

After a flirtation with pharmaceuticals and skincare, the focus on the core products - food, beverage and nutritional health - is being ramped up. What that means for the group's shareholding in L'Oreal, which has swollen to a value of EUR29bn since first investing in 1974, remains to be seen. Especially with some recent pressure from activists to sell its stake.

Possibly in response to those same activists, Nestle has adopted plans to boost margins. Higher profitability means analysts expect profits to rise from CHF 15.5 to CHF 18.2bn by 2021, and hopes are high that the dividend can follow suit and rise too. The prospective yield is 3.1%. But of course, there are no guarantees here.

These forecasts support the current valuation of 20.7 times expected earnings, ahead of the longer-term average.

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Full year trading details (changes on an underlying basis unless otherwise stated)

Nestle enjoyed organic growth across each of its divisions, with margins improving by 0.5 percentage points to 17% as a result of progress in all areas apart from the Waters division.

In The Americas sales rose 2%, with trends in both Latin America and the US and Canada improving over the year. Operating profit rose 1.5% to CHF 6.5bn, despite foreign exchange headwinds.

Sales rose 1.9% in EMENA, driven by the emerging economies of Central and Eastern Europe, Middle East and North Africa. In Western Europe, volumes improved, but were more than offset by weaker pricing. Operating profit rose 7% to CHF 3.6bn, boosted by a 0.8 percentage point margin gain.

Asia, Oceania and sub-Saharan Africa sales rose 4.3%, helped by a strong performance from China. Profits increased 4.8% to CHF 4.9bn.

Reported Waters revenue was flat at CHF 7.9bn, as organic growth of 2.1% was offset by disposals and currency movements. Higher packaging costs meant profits fell 15.4% to CHF 865m.

The Other businesses unit, including Nespresso and the health and skin care divisions, was boosted by acquisitions and strong underlying growth of 5.7%. Profits increased 15.5% to CHF 2bn.

Free cash flow rose 15% to CHF 10.8bn, but an increased share buyback and a net CHF 5.2bn spend on acquisitions meant net debt increased from CHF 21.4 to CHF 30.3bn.

The share buyback plan is now a shade over halfway through the CHF 20bn buyback announced in 2017, and intends to accelerate repurchases to complete the program by the end of this year.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.