Nestlé (VTX:NESN) Will Pay A Larger Dividend Than Last Year At CHF3.00

Nestlé S.A. (VTX:NESN) has announced that it will be increasing its dividend from last year's comparable payment on the 24th of April to CHF3.00. This takes the annual payment to 3.3% 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

We aren't too impressed by dividend yields unless they can be sustained over time. 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 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 27.8%. If the dividend continues along recent trends, we estimate the payout ratio will be 57%, which is in the range that makes us comfortable with the sustainability of the dividend.

Nestlé Has A Solid Track Record

The company has an extended history of paying stable dividends. The annual payment during the last 10 years was CHF2.05 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 3.9% a year over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

The Dividend's Growth Prospects Are Limited

The company's investors will be pleased to have been receiving dividend income for some time. 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. This isn't the end of the world, but for investors looking for strong dividend growth they may want to look elsewhere.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company hasn't been paying a very consistent dividend over time, despite only paying out a small portion of earnings. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 1 warning sign for Nestlé that investors should know about before committing capital to this stock. 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.