Nestlé's (VTX:NESN) Dividend Will Be Increased To CHF2.80

The board of Nestlé S.A. (VTX:NESN) has announced that it will be increasing its dividend on the 13th of April to CHF2.80. The announced payment will take the dividend yield to 2.4%, which is in line with the average for the industry.

View our latest analysis for Nestlé

Nestlé's Dividend Is Well Covered By Earnings

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. The last dividend was quite comfortably covered by Nestlé's earnings, but it was a bit tighter on the cash flow front. 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.

EPS is set to fall by 25.9% over the next 12 months. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 64%, 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 means that it has been growing its distributions at 4.2% per annum 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.

The Dividend Looks Likely To Grow

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Nestlé has impressed us by growing EPS at 17% per year over the past five years. Since earnings per share is growing at an acceptable rate, and the payout policy is balanced, we think the company is positioning itself well to grow earnings and dividends in the future.

In Summary

Overall, it's great to see the dividend being raised and that it is still in a sustainable range. However, lack of cash flows makes us wary of the potential for cuts in the dividend's future, even though the dividend is generally looking okay. 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.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. 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 2 warning signs (and 1 which is significant) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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