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The board of Nestlé S.A. (VTX:NESN) has announced that it will be paying its dividend of CHF3.00 on the 24th of April, an increased payment from last year's comparable dividend. This takes the annual payment to 3.2% of the current stock price, which is about average for the industry.
See our latest analysis for Nestlé
Nestlé's Earnings Easily Cover The Distributions
Unless the payments are sustainable, the dividend yield doesn't mean too much. The last dividend made up a very large portion of earnings and also represented 81% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but it is still in a reasonable range to continue with.
Over the next year, EPS is forecast to expand by 27.2%. If the dividend continues on this path, the payout ratio could be 57% by next year, which we think can be pretty sustainable going forward.
Nestlé Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2014, the dividend has gone from CHF2.05 total annually to CHF3.00. This implies that the company grew its distributions at a yearly rate of about 3.9% over that duration. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
Nestlé May Find It Hard To Grow The Dividend
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Earnings per share has been crawling upwards at 4.9% per year. There are exceptions, but limited earnings growth and a high payout ratio can signal that a company has reached maturity. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.
In Summary
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments Nestlé has been making. We would probably look elsewhere for an income investment.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for Nestlé that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.