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Nestle - sales outlook improves, strategy largely unchanged

In its annual investor seminar, Nestle said it now expects organic sales growth between 8-8.5%.

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In its annual investor seminar, Nestlé said it now expects organic sales growth between 8-8.5%. That's an improvement from the 8% previously guided.

The group said it's seen a 'sharp increase' in cost inflation in 2021 and 2022 and expects underlying operating margin of around 17.0% this year, in line with previous guidance. That's expected to trend toward the 17.5-18.5% range by 2025.

Focus for the next few years will remain on the Nutrition, Health and Wellness business segments. Food and beverages, including Nestlé Health Science and nutritional health products will be developed as future growth drivers.

Nestlé Health Science will sharpen its focus on Consumer Care and Medical Nutrition, with a review underway of Palforzia, a peanut allergy treatment, following weaker than expected results.

Nestlé reaffirmed its ongoing CHF 20bn buyback programme for the 2022-24 period. In 2022 so far, CHF 9.7bn of shares have been repurchased.

The shares fell 1.7% on the day of the announcement.

View the latest Nestlé share price and how to deal

Our view

With input costs on the rise, Nestlé's had to resort to price increases to keep things ticking along. That's contrary to the group's usual, volume led, strategy (more on that later) - but no one's immune to the wider inflationary pressures so it's a necessary flex.

The good news is that so far volumes are still managing to edge higher thanks to a strong range of products and price hikes mean overall sales growth is strong.

More broadly, the 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 in lockdown conditions. They're also exactly the kind of thing people buy over and over again in normal times.

We also admire the operating model, which focuses on volume instead of price increases. That's helped deliver underlying sales growth of at least 2% for over 20 years. And, despite obvious challenges to the model, sales are expected to keep moving in the right direction over the medium-term.

Mounting pressures from inflation are starting to take their toll on margins, that are trying their best to hold firm. For now, price hikes are pushing revenue high enough to offset lower margins. Though, there's a limit to how long that'll last.

Nestlé relies on a research & development spend of more than 1.5bn Swiss Francs (CHF) a year 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 group increase the dividend every year for 29 years - although remember all dividends are variable and not guaranteed.

The group has been doing 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 not a company likely to deliver dizzying levels of growth from here. It's more steady-eddie than stellar growth stock. However, Nestlé's not immune to wider pressures and the valuation has come down this year. Trading back in line with the longer-term average is still a reflection of the group's strengths, but also means there's pressure for sales to keep moving forwards.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 30th November 2022