Nestlé (VTX:NESN) Is Increasing Its Dividend To CHF2.80

Nestlé S.A.'s (VTX:NESN) dividend will be increasing to CHF2.80 on 13th of April. The announced payment will take the dividend yield to 2.3%, which is in line with the average for the industry.

Check out our latest analysis for Nestlé

Nestlé's Dividend Is Well Covered By Earnings

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, Nestlé was quite comfortably covering its dividend with earnings and it was paying more than 75% of its free cash flow to shareholders. The company is clearly earning enough to pay this type of dividend, but it is definitely focused on returning cash to shareholders, rather than growing the business.

Looking forward, earnings per share is forecast to fall by 28.1% over the next year. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 66%, which is comfortable for the company to continue in the future.

Nestlé Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2012, the first annual payment was CHF1.85, compared to the most recent full-year payment of CHF2.80. This works out to be a compound annual growth rate (CAGR) of approximately 4.2% a year over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

The Dividend Looks Likely To Grow

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Nestlé has impressed us by growing EPS at 17% per year over the past five years. Earnings are on the uptrend, and it is only paying a small portion of those earnings to shareholders.

Our Thoughts On Nestlé's Dividend

In summary, it's great to see that the company can raise the dividend and keep it in a sustainable range. The payments look okay by most measures, the lack of cash flow could definitely cause problems for them in the future. Taking all of this into consideration, the dividend looks viable moving forward, but investors should be mindful that the company has pushed the boundaries of sustainability in the past and may do so again.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Nestlé has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about. 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.