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Nestle - price hikes continue to feed sales growth

Nestlé has reported first-half sales of CHF 46.3bn, reflecting organic growth of 8.7%.

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Nestlé has reported first-half sales of CHF 46.3bn, reflecting organic growth of 8.7%. Price hikes of 9.5% drove growth as volumes were slightly lower, down 0.8%. Purina PetCare was the largest contributor to organic growth.

Underlying operating margins were 30 basis points higher at 17.1%, ignoring the effect of exchange rates. Underlying operating profit rose 2.9% to CHF 7.9bn.

Free cash flow more than doubled to CHF 3.4bn, helped by the sale of the group's stake in Prometheus Biosciences. Net debt rose from CHF 48.2bn to CHF 55.6bn, largely as a result of buybacks and dividend payments.

The group has nudged up its full-year organic sales growth guidance from 6%-8% to 7%-8%. The underlying operating margin is still expected to be in the 17.0%-17.5% range.

The group completed CHF 2.4bn worth of buybacks in the first half.

The shares rose 1.8% following the announcement.

View the latest Nestlé share price and how to deal

Our view

Nestlé's showing just how important it is to have a strong suite of brands. That's allowed the group to push through another round of near double-digit price hikes with little impact on volumes. Animal lovers continue to fork out for Purina PetCare and KitKat consumers continue to need a break, despite ever-increasing pressure to cut back spending.

Underlying performance has been very impressive. A global footprint and varied product base mean the Group's been able to move with the market over the past couple of years. Exposure to pet care, health and at-home coffee products in particular helped pull in revenues from all corners of the market. These items are also exactly the kind of thing people buy over and over again in normal times.

The outlook, despite ongoing pressure from inflation, is pretty good. There's even scope for margin expansion this year, no mean feat in current conditions. Though, that'll be reliant on volumes staying firm as there's unlikely to be any let up on the price side of things.

Nestlé relies on hefty research & development spending to provide fuel for volume growth. New varieties and formats of existing popular brands benefit from the much larger marketing and admin budgets, ensuring they're front and centre of consumers' minds. That, in turn, encourages reliable revenues. Extra sales boost profits, and profits can be paid out as dividends or reinvested in next year's products.

That virtuous cycle has seen the dividend increase every year for 29 years - remember, all dividends are variable and not guaranteed.

There's been a bit of housekeeping recently, clearing out low-potential brands and stocking up in growth areas such as The Bountiful Company's nutrition and supplements business. A higher growth portfolio can only be a good thing, and the Group's been trimming its stake in L'Oréal, which stood at 20.1% last we heard.

Nestlé's a strong business, with a host of great brands and several growth levers still to pull. Exactly how volumes will react to continued higher prices remains to be seen, but on current trends, they're stubborn enough to support top and bottom-line performance. All being well, mid-high single-digit growth is on the cards. Of course, there are no guarantees.

At those levels, growth won't be shooting any lights out. Nonetheless, in the current environment, steady comes at a premium. The main thing keeping a check on the optimistic view is on the valuation side, which looks to have priced in a good chunk of those strengths.

Nestlé key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 27th July 2023