Nestlé

A heavyweight for the portfolio

People will always eat and drink - so shouldn't you obviously get a piece of that with an investment? And who would be better suited than the world's largest food manufacturer, Nestlé? Well, it's not quite that simple after all. The consumer goods industry is undoubtedly going through upheaval. Thanks to the internet, small start-ups today have a much easier time competing against the big corporations. And the trend toward healthier and more sustainable eating is continuing too - frozen pizzas and instant soups simply don't fit on many millennials' menus anymore.

Nestlé is nevertheless on a good path. No other food company puts as much money into researching new dishes and its customers' needs. The conglomerate spends more than €1.5 billion a year on that - and it definitely pays off in the long run.

The history and business model of Nestlé S.A.

Heinrich Nestle was born in Frankfurt am Main in 1814 and completed his pharmacist training at the age of 20. Since he wanted to see more of the world, he decided to spend a few "work and travel years." So 5 years later he arrived in Switzerland, in Lausanne to be precise, where he passed his licensing exam as a druggist. He quickly found his first job in Vevey, too, but in 1843 he decided he'd rather go the self-employed route. By the way, during that time he also adapted his name - and so he became Henri Nestlé. He tested lots of different business models, producing vinegar, oil, fertilizer and cement, among other things, and selling them to an increasingly modern population - but none of it really wanted to work. Only at the age of 53 did he turn to the problem of the high infant mortality rate. He developed a healthy and nutrient-rich breast milk substitute, which he brought to market in 1867 as "Kindermehl" (infant flour).

He tested his product on a sick toddler. When the child got healthier again after a few days, word quickly got around, and Nestlé's infant flour tins became a bestseller. While 8,600 units were sold in 1868, by 1875 it was already over a million. By that time he had already built a distribution network in 18 countries. Nestlé had his family coat of arms printed on the metal tins: a nest with birds being fed by their mother. The company has kept this logo to this day. Henri wanted to enjoy his retirement, so he sold Nestlé to 3 businessmen

In 1905 the company merged with its main competitor, the Anglo Swiss Condensed Milk Company. Several acquisitions followed, and business areas were steadily expanded and developed. In 1929 the Swiss chocolate maker Peter-Cailler-Kohler was bought up, and in 1938 Nescafé was launched. Maggi was added in 1947. From the 1960s on, many people had a freezer at home, so Nestlé bought its way into the frozen food business. In 1969 came the step into the mineral water business. In 2001 it merged with Ralston Purina to create the new market leader in pet food - Nestlé Purina Petcare. Today Nestlé has more than 2,000 different brands in its corporate portfolio and is thus perfectly positioned for the future.

How will business at Nestlé go in the future?

As I already wrote in the introduction, the Swiss food giant invests an enormous amount of money in researching new products. For example, Nestlé subsidiary Garden Gourmet recently launched the Incredible Burger. A burger made from purely plant-based ingredients that still tastes like meat. By the way, the meatless burger variant is already available to eat at McDonalds. You could also see the popularity of these vegetarian burgers with Beyond Meat. For the environment's sake, I hope this isn't just a short-lived hype but remains a long-term alternative. There's definitely enough money in the market.

But it's not only with new products that the company wants to become more profitable - it also wants to do so by selling weak divisions. Last year, for example, it sold its confectionery business in the US to Ferrero for a whopping €2.4 billion. The German sausage maker Herta and the skin care division will probably have to go too. Some investors are even demanding that Nestlé sell its L'Oréal stake. "It should focus more on its core business," they say. The money could be used for further acquisitions, research or even share buybacks. Nestlé CEO Schneider, on the other hand, considers the L'Oréal stake a "fabulous investment."

One very clear growth driver for Nestlé is surely its expansion into emerging markets. There it offers a specially tailored product range that responds exactly to people's needs. On top of that, the growing middle class in these countries likes to treat itself to well-known Western brand-name products. So emerging markets remain highly interesting for Nestlé too.

Is Nestlé stock worth it for dividend hunters?

Shareholders have been receiving a share of the profits since 1923. Since 1997 it has also been raised every year - so it won't be long before the company gets to join the elite circle of Dividend Aristocrats. Over the past 10 years the dividend was raised by 7% on average. The current yield is 2.3% - the payout ratio, though, is already relatively high at around 70 percent. As a German investor, by the way, you shouldn't forget the hefty 35% withholding tax either!

Conclusion:
Nestlé is an extremely broadly diversified food company that employs the best researchers and producers in order to remain number 1 in the industry in the future as well. Hardly any other company has as many strong brands in its portfolio as the Swiss company. I think Nestlé is interesting for investors looking for a solid anchor for their dividend portfolio.