NESTLE FINANCIAL CONSISTENCY AND REWARDS TO INVESTORS

 

HISTORY

In 1957, Nestle began trading and distributing of its products in the central and West African region, starting in Ghana under the name Nestlé’s products ltd. The company then made a strong foothold in Nigeria and in Cote d’ivoire in 1959, followed by Senegal in 1961, before spreading to other neighboring countries.
The simple trading operation that commenced in Nigeria back then, has today grown into a leading food manufacturing and marketing company.

Nestle listed on the Nigerian stock exchange on April 20, 1979 has Nestle S.A. of Switzerland and Nestle CAW Limited, Ghana as the major shareholders, controlling 3.17 and 59.13 percent respectively. The head office of the Nestle` Central and West Africa region (Nestle`CWAR) is based in Accra from where it oversees the management of the company’s operations and aligns in 22 countries of the region.

Nestle Nigeria PLC
Share Holding Structure
Nigerians	37.24%
Nestle S.A., Switzerland	3.17%
Nestle CWA Ltd, Ghana	59.59%
Other Statistics
Shares Outstanding (MN)	792,656,252
Opening Price (2015)	N995.60
Total Volume Traded (2014)	66,336,812
Current Price (2015)	N820.00
Date Listed	20th April, 1979
Year End	31st December

General Industry Review:

In 2014 and  the years before,  companies in consumer goods sectoral,  manufacturers of  staple food, beverages and  other cyclical consumable products tried to meet consumers’ daily need at any given time. It is obvious that this sector of the manufacturing industry has always battled with high cost of production, just like other the manufacturing industry to remain afloat. 
This battle of high overhead in the real sector has prevented the manufacturing sector from contributing significantly to the nation’s Gross Domestic Product (GDP) that measures the general economic performance of any nation.
Today, the agricultural sector seems to be the only industry that appears to be contributing much to our GDP after the oil and gas sector which production and pricing are at the mercy of militants, oil theft and international market oil price which has lost more than 56 percent in the last two years. This was as a result of dwindling oil price that depleted the nation's reserve, which led to naira devaluation. Government's commitment to resolve food security and create employment for many Nigerians especially the youth remained the major force behind the sector's growth.  This pathetic situation could further be extended to the manufacturing industry with dwindling output due to a number of factors affecting its growth and development.

Revival and sustainability of the nation’s manufacturing sector could only be achieved through diversification and infrastructure development. Industries are supposed to be the engine room for real sector growth and development, but foot-dragging in this all-important sector can only lead to less contribution to the GDP and under utilization of industrial/human capacity. With the growing rate of private consumption in the economy, government should increase its commitment to drive the sector with policies that could encourage direct investment in manufacturing to boost its GDP contribution.

It should however be emphasized here that a stable democratic government is a strong foundation for business and economic growth. But sadly, the prevailing state of insecurity in the North East, uncertainty of the general polls and weak macroeconomic indices are certainly not helping matters.

			Profitability & Rewards for 10 years
Years	2014	2013	2012	2011	2010	2009	2008	2007	2006	2005
	M	M	M	M	M	M	M	M	M	M
Turnover	143,329	133,084	116,707	97,961	80,109	65,753	49,802	42,376	36,981	33,048
PAT	22,236	22,258	21,137	16,496	12,602	9,783	8,331	5,441	5,660	5,303
EPS	28.05	28.08	26.67	21.20	19.08	14.81	12.61	8.78	10.71	10.04
DPS	27.50	25.50	20.00	12.55	12.55	12.55	12.75	8.20	10.35	10.00
Bonus					1;5				1;4

Nestle’s Performance
Looking at the company’s performance critically since the past five years - between 2010 and 2014 – it is evident that there has been a stable up trend performance with positive numbers that reveal the competence of the company’s management. 
Its sales revenue for the period has grown by 79 per cent - from N80.11 billion in 2010 to N143.33 billion in 2014; while the bottom line for the same period was up by 76.45 per cent to N22.24 billion, from N12.60 billion recorded in 2010.
Within the period, the economy moved from its gloomy state to a recovery stage due to positive reforms before this ongoing economic and political uncertainty.

The impressive earnings emanated from the company both locally and globally indicate that something is working effectively and efficiently for the Nestle group. Of all companies listed on the exchange, Nestle has been consistent in releasing its quarterly and yearly results as at and when due to reflect its corporate governance of keeping to its post-listing requirements.
Its earnings power has been growing as price performance also maintained a rallying posture since it was listed on the exchange in 1979 but slowdown in 2015 due to general bear market as a result of the forthcoming elections. The company’s share price had oscillated within 36 years of being a quoted company.  The strong performance of its share price was attributed to the consistent growth in its earnings and dividend payout during the period. 
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In the last 36years, Nestle Nigeria Plc has paid dividend in cash or script to its shareholders 60 times, including interim and final. This is the only company that has grown its dividend payout in a decade with 175 per cent from a total dividend of N10 paid in 2005 to a total dividend of N27.50 in 2014.  It is the first listed company in the history of the Nigerian Stock Exchange to announce a dividend of N17.50 in addition to an interim dividend of N10 paid earlier, making it a total of N27.50 dividend for the year 2015.
Also, it is the first stock on the exchange to sell above N1000 which is about $5 per unit though still a penny stock in the eyes of foreign investors.  This is a reflection of the company’s commitment and focus in delivering value to its shareholders through sustainable capital efficient and profitable long term growth.

Investment Analysis

The price performance of Nestle between 2010 and today has been tremendous. This is a reflection of growth in the company’s performance for the period.
However, within the period under review, the stock price recorded a low of N239.50 as at January 6, 2010 and bounced back geometrically to hit a high of N1, 250 as at November 27, 2013 to close the year 2014 at N995.50.
The stock is currently trading at N820. The rally witnessed within that period till now is as a result of very strong investors’ confidence built by constant and timely released of its numbers, good dividend payout, low share capital and efficient management
The earnings per share increased from N19.08 in 2010 to N21.02 in 2011, representing a 10.17 per cent growth. This was maintained in 2012 as earnings per share went up by 26.8 per cent to N26.67 from the N21.02 posted in 2011. 

During this recovering time, the company’s dividend grew from the N12.55 paid in 2011 to N20.00 paid in 2012. Its EPS for 2014 stood at N28.05, from the N28.08 recorded in 2013, representing 11 per cent flat for the period. Here the harsh business climate and unstable macroeconomic indices militated on its performance expected that improvement in the economy after the elections will boost results. 
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The company’s earnings power for 2014 was flat at N28.05 to reflect the high cost of operation that had eaten into its profit margin for the period. In 2013, the company paid a total dividend of N25.50 to its shareholders and in the recently released 2014 financials, the company is recommending a dividend of N17.50 for investors whose name would be in the company’s register before close of business on April 24, 2015.  The interim dividend of N10 paid late last year brings the total dividend to shareholders for the 2014 financial year to N27.50.
The company’s dividend for the period of five years has grown by 119 per cent; while its earnings for the same period was up by 47 per cent to reflect high payout of the company in creating value for its investors. 
Its relative small number of shares in issue and the holding structure of the company have equally supported its earnings power which has continually boosted investors’ confidence in the stock and the company.
The positive strong increasing operational cash flow is a plus and it is good for the company as it indicates good performance but decline in this last result need to be watched. 
The company’s recent full year scorecard revealed flat performance as numbers posted were constant.  It shows things are tight in the sector and in the company but the possibility of the company surpassing its forecast for this current year is slim.

Strengths and Opportunities

The share value program of the company that supported the backward integration to source its raw material locally has impacted many stakeholders directly and indirectly which contributed to the production process of the company.  The stable internal power generation to sustain the company’s production lines, increase export market needs, increased capacity to meet local demand, multiple products lines and the inelastic nature of demand for its products that increased in price might not affect sales so much due to the essential nature of its products, expected relative stable macroeconomic outlook after the elections and other factors that will drive sales.

Management prowess and good understanding of the local and international markets and the strong brand name in its industry are pluses; coupled with good succession plan as subsequent leaders will always emerge from the system for continuity.

Good compliance and best international practice, good track record, strong corporate social responsibility and development of agriculture in the country – all speak well for the company’s image.   

Weakness and Threats

The major threat is government’s inconsistent policies, dwindling retained earnings, high dividend payout ratio, exchange rates, high interest rates, insecurity in some parts of the country, high cost of sales and dwindling purchasing power of the many Nigerians, coupled with the high cost of living.Also, increase in number of cottage industries is a threat and falling oil price.

Valuation

The valuation method used here is the Price to earnings ratio. Its PE ratio as the full year financials for 2014 stands at 29.23 times. This explains the high expectation of investors from Nestle. On the strength of its numbers, the stock is likely to bounce back and surpassed its former high of N1, 250 before the current financial year audited result hit the market next year.

Investors with medium and long term perspectives that want to take low risk with moderate returns and at same time preserve capital should keep their gaze on this equity, especially now that the price is dropping.

The more its share price drops, the more attractive the stock becomes.