Nestlé: A Diversified Bunker In The Food Industry

Aug. 20, 2015 9:11 AM ET  |  

Summary

• Incoming market turbulence has investors scrambling to take shelter in index funds, ETFs, and diversified utilities/industrials companies.
• Meanwhile, Swiss multinational food company Nestlé has maintained solid margins, steady growth, and excellent return on investment for shareholders at a 9.4% CAGR in the past few years.
• Investors looking for new diversification bunkers should seriously consider Nestlé as a shelter of choice.

Diversification.

That one word constantly seems to be on everyone's mind, manifesting itself through the following question: How can I get more diversified? Frequently investors think of buying more companies, or perhaps investing in an index or an ETF. Both, however, cost a decent amount, the former through transaction fees and the latter through management fees.

There is one other (cheaper) way: Buying diversified companies. Yet when investors think of diversified companies, they frequently only think of one type of company: the diversified industrials company. That's all fine, but what if an investor wants a different type of diversified company?

Enter the diversified food company. Frequently food distributor and retailer companies focus on one particular niche market, whether it be center-of-the-plate proteins, natural and organic foods, or vegetarian cuisine, and few diversified food companies exist. However, it's not particularly difficult to find them, and one of these companies has been staring investors in the face for quite some time now: Nestlé (OTCPK:NSRGY), a Swiss multinational food company, is the largest food company in the world (by revenue), and its diversification rivals that of the largest diversified industrials companies. As such, Nestlé would be an excellent choice for investors looking to bunker down for the incoming market turbulence in the latter half of 2015 and early 2016 to 2017.

Taking a look at Nestlé's stock chart, investors can see relatively slow but steady increases throughout the past five years in share value, which is always a good sign. From 2011 to today, share prices have increased from $50.00 to about $75.00, about a 50% return on investment and a 9.4% CAGR YTD.

Source: Google.

This consistent growth is a result of Nestlé's stability as a result of such diversification. This diversification aided the Company during the 2008 financial crisis, when the Company's shares dipped just a tiny amount before its 1-to-10 stock split as other companies saw their stock prices fall off a cliff.

With such a diverse revenue base spread out across many different products, the Company is able to maintain steady gross and operating margins, which have hovered around 47.5% and 13.0% in the past five years in the face of a consistent revenue stream. As a result, the Company's bottom line has been increasing as well, evidenced by a diluted earnings per share that has grown at a CAGR of 11.1% over the past four years. Free cash flow has been keeping pace with the growth of the Company, which has allowed it to fuel long-term expansion while maintaining near- to mid-term shareholder value. With consistency, operating cash flow provides ample liquidity for the Company, and Nestlé has maintained cash and cash equivalents in the range of the high $5,000Ms to low $8,000Ms for the past several years. All of these factors have led to a sizable chunk of change in the Company's coffers-retained earnings have been in the range of $80,000M to $90,000M since fiscal year 2010.

Although the Company is far past the rapid growth stage, it continues to deliver product innovation to keep its revenue stream alive and well. These new products include the launch of Lean Cuisine Marketplace and Stouffer's Fit Kitchen lines, as well as new, healthier versions of well-known candy brands, including Butterfinger and Baby Ruth. Perhaps even more interesting is Nestlé's skin care operation, which began conducting R&D last fiscal year. Breaching this new product market will further increase Nestlé's diversification and shareholder stability. Nestlé continues to plan to fuel R&D for new products, as investors can see through the opening of a new $50M R&D facility in Solon and the continued heavy R&D spending that Nestlé executes.

On a more somber note, Nestlé has made some mistakes, most notably with Maggi, Nestlé's line of seasonings, instant soups, and noodles. Government officials in India have tested Maggi products and found MSG levels in excess of the permissible limit. This has resulted in a profound impact on top line growth and has shaken Nestlé's grip on the India market (Note: Nestlé India Ltd. trades ADR shares under the symbol OTC:NSZTY). However, investors do not need to worry, as diversification will protect Nestlé's revenue stream. Even controversial events like these will not result in material declines in revenue, and Nestlé will quickly recover in the following quarters.

All-in-all, Nestlé is a solid, stable, diversified company to invest in. It has survived the 2008 financial crisis quite well. It has returned shareholder value, both through capital gains and a strong 3.00% dividend yield. It has continued to grow and maintain margins. Nestlé could be a bunker of choice for the diversified investor waiting to weather the incoming market storm.