Nestlé (VTX:NESN) Is Paying Out A Larger Dividend Than Last Year

Nestlé S.A. (VTX:NESN) has announced that it will be increasing its dividend from last year's comparable payment on the 26th of April to CHF2.95. This makes the dividend yield about the same as the industry average at 2.7%.

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. At the time of the last dividend payment, Nestlé was paying out a very large proportion of what it was earning and 120% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Over the next year, EPS is forecast to expand by 61.2%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 55% which brings it into quite a comfortable range.

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 2013, the annual payment back then was CHF2.05, compared to the most recent full-year payment of CHF2.95. This implies that the company grew its distributions at a yearly rate of about 3.7% over that duration. 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.

Nestlé Could Grow Its Dividend

The company's investors will be pleased to have been receiving dividend income for some time. Nestlé has impressed us by growing EPS at 8.5% per year over the past five years. EPS has been growing at a reasonable rate, although with most of the profits being paid out to shareholders, growth prospects could be more limited in the future.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Nestlé's payments are rock solid. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. This company is not in the top tier of income providing stocks.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 4 warning signs for Nestlé that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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