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Nestle - growth in all product areas but sales miss forecasts

Sophie Lund-Yates, Equity Analyst | 13 February 2020 | A A A
Nestle - growth in all product areas but sales miss forecasts

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Nestle Sa Ordinary CHF0.01

Sell: 102.60 | Buy: 102.62 | Change -0.16 (-0.16%)
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Full year sales rose 1.2% to 92.6bn Swiss Francs (CHF), behind analysts' expectations of CHF 93.4bn. Excluding disposals of Nestlé Skin Health and Gerber Life Insurance, as well as unfavourable currency movements, sales rose 3.5%.

The board has proposed a dividend of CHF 2.70 per share, an increase of 25 centimes, and commenced a new CHF 20bn buyback program in January.

The shares fell 1.3% following the announcement.

View the latest Nestlé share price and how to deal

Our View

Nestlé's first ever product was a child nutrition supplement - a sector that still accounts for a large chunk of sales. Other staples like KitKat and Nescafe have joined the stable over the group's 154 year history, with the theme being very much evolution, rather than revolution.

Consistency has been the watchword for the group's financials too. Nestlé 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 steady rather than spectacular in recent years.

That's a trend across a lot of the big consumer goods groups these days as brands lose potency. But impressively Nestlé's been able to keep volumes growing ahead of prices. That's a sign demand has remained strong, and is arguably better than maintaining sales by squeezing consumers on price.

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 products and varieties. Once innovations are established, the marketing and admin budget of almost CHF 20bn ensures they're front and centre of consumers' minds.

Extra sales boost profits, and profits can be paid out as dividends or reinvested in next year's products. The cycle can start again.

Following the CHF 10bn disposal of the skincare business, the focus is returning to the core food, beverage and nutritional health products. We think that's a sensible move. However, what it means for the group's 23% shareholding in L'Oréal remains to be seen. Especially given pressure from activists to sell the stake.

Possibly in response to those same activists, Nestlé has been working to boost margins. Higher profitability means analysts expect profits to rise from CHF15.5 in 2018 to CHF 18.1bn by 2022, and hopes are high that the dividend can follow suit and rise too. The prospective yield is 2.7% next year, but of course, there are no guarantees.

Forecasts for continued earnings and dividend growth mean the shares currently change hands for 22.8 times expected earnings. That's some way above the longer term average, which is a vote of confidence from the market, but also means the shares could fall if progress disappoints.

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

Trading operating profit, which ignores the effect of restructuring expenses in the Chinese canned good business, rose 4.8% to CHF 16.3bn. Trading operating margins rose 0.6 percentage points to 17.6%, helping the group reach its 2020 profitability target one year ahead of schedule. That was driven by cost savings, and improved pricing along with a favourable mix of products sold.

The improved operational performance and share buyback program helped earnings per share rise 11.1% to CHF 4.41.

In The Americas, sales rose 3.9% to CHF 33.2bn, driven by a 2.6% increase in volumes and a 1.3% improvement in price. North America saw its strongest volume uplift in over a decade, and there was strong demand for Purina PetCare and beverage products. Operating profit rose around 7.7% to CHF 7bn, despite increased marketing spend.

Asia, Oceania and sub-Saharan Africa saw sales rise 3.2% to CHF 21.6, operating profit reached CHF 4.9bn (2018: CHF 4.8bn).

Sales rose 2.7% in EMENA (Europe, Middle East and North Africa), reaching CHF 18.8bn as volume increases offset negative pricing. Each sub-region had positive organic growth, with acceleration in Western Europe and Eastern Europe, particularly Russia. Operating profit rose slightly to CHF 3.6bn (2018: CHF 3.5bn), helped by cost reductions.

Waters organic revenue rose 0.2% to CHF 7.9bn, as positive pricing offset volume declines. The Other businesses unit, including Nespresso and the health and skin care divisions, posted organic growth of 6.4%.

Free cash flow grew by 10.9% to CHF 11.9bn, which combined with the disposals of Nestle Skin Health and the US ice cream business, saw net debt fall to CHF 27.1bn (2018: CHF 30.3bn).

The group expects restructuring costs to be around CHF 500m next year, and is closely monitoring the impact of the coronavirus.

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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 disclosure for more information.