Nestlé (VTX:NESN) Has Announced That It Will Be Increasing Its Dividend To CHF3.00

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 3.1% of the current stock price, which is about average for the industry.

See our latest analysis for Nestlé

Nestlé's Dividend Is Well Covered By Earnings

We aren't too impressed by dividend yields unless they can be sustained over time. Before making this announcement, Nestlé's was paying out quite a large proportion of earnings and 81% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but we don't think that there are necessarily signs that the dividend might be unsustainable.

The next year is set to see EPS grow by 27.9%. Assuming the dividend continues along recent trends, we think the payout ratio could be 57% by next year, which is in a pretty sustainable range.

Nestlé Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The annual payment during the last 10 years was CHF2.15 in 2014, and the most recent fiscal year payment was CHF3.00. This works out to be a compound annual growth rate (CAGR) of approximately 3.4% a year over that time. Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think makes this a fairly attractive offer.

Dividend Growth May Be Hard To Achieve

The company's investors will be pleased to have been receiving dividend income for some time. Earnings has been rising at 4.9% per annum over the last five years, which admittedly is a bit slow. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.

Our Thoughts On Nestlé's Dividend

Overall, we always like to see the dividend being raised, but we don't think Nestlé will make a great income stock. While Nestlé is earning enough to cover the dividend, we are generally unimpressed with its future prospects. This company is not in the top tier of income providing stocks.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. 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. Is Nestlé not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.