NESTLE PLC: DIVIDEND EQUALISATION HOLDS PRICE

Nestle Nigeria Plc's consistency and in compliance with best international practice, good track record of continuous improvement of  its earnings power by expanding and breaking into new markets within and outside the shores of Nigeria with products innovation added to effective cost management, all of which have supported performance. 

The nature of the company's products reflected on it top line in the year ended December 31, 2015, despite the falling purchasing power of many Nigerians.Its array of nutritional products that  target a wide range of the market from infancy to adulthood. This product lines had over the years ensured the company posted positive figures of which  2015 was not exceptional with the marginal growth.The company's full year financial scorecard is the basis for valuation in the market, compared to the2014 numbers which reveal that the market price dropped by 17.48 percent to N680 per unit from N824.01 in 2014. This market price is at the released date of the company results.

Meanwhile, the company recorded a slowdown in sales revenue despite the marginal increase of 6 percent from N143.33 billion to N151.27 billion. Total earnings after considering all interest and tax equally inched north at N23.74 billion as against the previous N22.24 billion. On the other hand, Net Assets was also up by 6 percent to stand at N38.01 billion from N35.94 billion.

NESTLE NIGERIA
Audited Full Year  December 31, 2015
COY	2014	2015	% Chg
	(N)	(N)
Date Released	25-Febunary-15	16-March-2016
Price at Released Date	824.01	680.00	-17.48
Turnover	143,328,982,000	151,271,526,000	6.00
Profit After Tax	22,235,640,000	23,736,777,,000	7.00
Shareholders' Fund	35,939,643,000	38,007,074,,000	6.00
Dividend	17.50	19.00
ESTIMATED RATIOS
Earnings Per Share	28.05	29.95	7.00
PE Ratio	29.37	22.71	-22.68
Earnings Yield	3.40	4.40	29.41
Book Value	45.34	47.95	6.00
ROE	61.87	62.45	0.94
Profit Margin	15.51	15.69	1.16
Year End	Dec	Dec

Recommendations

Though Nestle's share price may be said to be on the high side by most valuation tools, investor sentiments, financial consistency, frequency of dividend payments in form of interim and full year, these had made the stock the toast of income investors. The leading role played by the equity in its industry remains a very strong factor in the sustenance of its share price. 

Traders are not expected to venture into this stock, as it does not hold tradable characteristics for now. But any drop in the share price to below N600 per share would make it more attractive for short term players.

Investors at various levels may consider positioning in the equity for its sure dividend incentives and its defensive nature, especially now that the company has declared a final dividend of N19 for 2015. Income investors that want to protect their capital with regular income should jump in on the stock now. But the fact that company continues paying all its earnings as dividend is not healthy as shown in the total payout ratio of 97 percent is high.

It should however be noted that history dating back to 1999 confirms that this equity has experienced various heavy price drops from which it has always recovered, due to consistent growth in earnings and expansion. Therefore, even if the price suffers short, medium or long-term pull back, changing your investment strategies to long term remains the best investment decision for Investors, especially income investors.

Nestle Price Action

 

Despite the marginal growth in the company's earnings and the total N29 dividend declared recently, the share price is still trending down, looking for a support level. As mentioned above, anything below the bottom yellow line is a good time for traders to position.

Summary and valuation

Nestle is one of the mutil-nationals in Nigeria with the best management teams in the beverage industry. The company's mild performance is a response to the decline in the value of the Naira, which has combined with the harsh business environment. Analysts recently argued that the market's instability will hit Nestle’s momentum. This is because the disposable income of consumers will influence demand as the economy continues to slow down but the nature of it products has always attract sales.

However, the export of some of Nestle's products to UK and USA helped sales up and may have contributed significantly to the six percent sales growth. 

The company's softer input and finance costs management with the impact of it backward integration have also reflected on its bottom line regardless of the nation's economic stagnation that has hampered the performance of many companies, as seen in the number of those (particularly the banks) that have so far issued profit warning.

It does show, though, that Nestle has managed to wade through an unfriendly business environment. The overall strategy of the company remains sound as it focuses on products that are essential to human living. This helps to improve its pricing power.

Consumer staple companies like Nestle look expensive against near-term valuation metrics. However, the sector has been resilient and delivered strong long-term results for investors.

Nestle’s P/E ratio currently stand at 22.71x earnings and then it is expected to fall to 18.98X by 2017. Paying for quality makes sense in our view and Nestle is one of the best quality companies listed on the exchange. Its profit margin of 15.69 percent is good and above the 15 percent international standard, just as the return on equity of 62.45 is impressive, being a pointer to the fact that shareholders' funds have been effectively utilized by the company's management. 

History

In 1957, Nestle began trading and distributing its products in the central and West African region, starting in Ghana under the name Nestlé Products Limited. 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 neighbouring countries.
The simple trading operation that commenced in Nigeria back then, has today grown into a leading food manufacturing and marketing company. 

Nestle, which was 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 per cent 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 across the 22 countries in 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
Open Price (2015)	N995.60
Close Price (2015)	N860.00
Current Price as at (Mar 18  2016)	N680.00
Date Listed	20th April, 1979
Year End	31st December

                               

Management

Since Mr. David C. Ifezulike and Mr. Dharnesh Gordhon started to oversee the board and management of Nestle Nigeria Plc in 2013, performance has continued to oscillate reflecting the challenging business environment facing the industry and the economy at large. Despite this harsh climate the company has continued to create value for all stakeholders in its shared valued principle that had kept it ahead of others in its industry and the market. 

Products

Nestle Nigeria Plc. manufactures, markets and distributes food products throughout Nigeria and outside the nation's shores. The company also manufactures Hydrolysed plant protein mix and other food products based on its local agricultural raw materials under its backward integration program.Among other products of Nestle Foods are: cereals baby food, food seasoning and beverages, Range of the Maggi brand of food seasoning, Nestle Nutrient, Cerelac, Nan- Baby food, Nestle Golden Morn - Cereal, Nestle Nido, Carnation - Milk and Nestle Milo, Nescafe brand of beverages. The company has a general license agreement with Societe Des Produits Nestle S.A., Nestec S.A and Nestle S.A for the provision of technical and other support services.

Industry

The sector faces many challenges caused by the environment in Nigeria such as poor infrastructure, poor standards of education (in some areas), insurgency, bad roads, erratic power supply, high level of corruption, high Dependency Ratio and a generally low level of disposable income of the population.The industry is generally characterized by wholesalers and distributors. This happens to be the popular method of selling over 70% of total sales within the industry.

Notable players in the industry include Cadbury Nigeria Plc, Nestlé Nigeria Plc, UAC Foods, and Wamco Nigeria Plc, four of which are listed on Nigerian Stock Exchange. Wampco is currently traded on NASD.

In most cases, in order to present products to Nigerians at cheaper cost, large international companies often form alliances with Nigerian companies, to repackage and/or market their products in the country. The essence of this is to reduce the risk of market entry, as well as enable the international partner benefit from the existing marketing and distribution capabilities of the Nigerian entity.

Five-Year Financial Analysis

The company has been noted for its consistence in the release of its financials during the period under review, not withstanding this year's slight delay. One must fail to acknowledge that is was still within approved timeframe. This adds up to its valuation status as it stands sure in portfolio management effectiveness. The market price as at released dates on the other hand experienced an outstanding growth from the N441.00 of 2011 to all high of N1071.00 in 2013 to close at N680 in 2015, the price when 2015 audited   result hit the market last week. Looking at the company’s performance critically between 2011 and 2015, 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 54.42 per cent from N97.96 billion in 2011 to N151.27 billion in 2015; while the profitability level for the same period was up by 41.23 per cent to N23.74 billion, from N16.81 billion recorded in 2011 as earnings remain almost flat for the period three years within the years under consideration. Within the same period, the economy moved from its gloomy state to a recovery stage due to positive reforms before pulling back to the another depressed economic situation that had befallen the nation.

Meanwhile, Net Assets stands at N38.01 billion as against the N23.49 billion posted in 2011 after recording a high of N40.59 billion in 2013. Dividend grew through the period from N12.55in 2011 to the latest dividend of N29 representing 131.08 percent increased. Please note that dividend reward grew more than the revenue and earnings for that same period which is not too good. Such high payout ratio does not support future payments and expansion. 

NESTLE NIGERIA
FIVE YEARS FINANCIAL PERFORMANCE
YEAR	2011	2012	2013	2014	2015
Ticker	(N)	(N)	(N)	(N)	(N)
Date Released	22-Feb-12	20-Feb-13	26-Feb-14	25-Feb-15	16-Mar-16
Price At Released	441.00	981.00	1071.00	820.00	680.00
Turnover	97,961,000,000	116,707,394,000	133,084,076,000	143,329,000,000	151,271,526,000
PAT	16,808,000,000	21,137,275,000	22,238,279,000	22,236,000,000	23,736,777,000
Net Assets	23,492,000,000	34,185,562,000	40,594,801,000	35,939,640,000	38,007,074,000
DIVIDEND	12.55	20.00	24.00	27.50.	29.00
BONUS

Five Years Estimated Ratios

The earnings per share of Nestle stands at N29.95 as against the N21.20in 2011. In other words, the growth in earnings power has reduced the investment periods over the years as PE ratio stood at 22.71x from high of 38.17x in 2013 as observed, this is because  the rate of growth in market price has not been same with the growth in Earnings, even while share outstanding remain relative the same over time. The Book Value of the equity at the end of 2015 stands at N47.95 as against the market price of N680 this simply shows that Nestle share price is grossly overpriced but supported by it consistent dividend payment. Long term investors over the years have recouped their investment and enjoy relative capital protection in this stock.

NESTLE NIGERIA
FOUR YEARS ESTIMATED RATIOS
YEAR	2011	2012	2013	2014	2015
EPS(N)	21.20	26.67	28.06	28.05	29.95
PE Ratio	20.80	36.79	38.17	35.49	22.71
Earnings Yield	4.81	2.72	2.62	3.68	4.40
Book Value	29.64	43.13	51.21	45.34	47.95
Return on Equity	0.72	0.62	0.55	0.48	0.62
Profit Margin	17.16	18.11	16.71	15.51	15.69
Year End	Dec	Dec	Dec	Dec	Dec