Nestlé's (VTX:NESN) Dividend Will Be Increased To CHF3.05

The board of Nestlé S.A. (VTX:NESN) has announced that it will be increasing its dividend by 1.7% on the 24th of April to CHF3.05, up from last year's comparable payment of CHF3.00. This will take the dividend yield to an attractive 3.6%, providing a nice boost to shareholder returns.

See our latest analysis for Nestlé

Nestlé's Payment Could Potentially Have Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Nestlé's dividend made up quite a large proportion of earnings but only 72% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.

Looking forward, earnings per share is forecast to rise by 19.4% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 63%, 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. Since 2015, the annual payment back then was CHF2.15, compared to the most recent full-year payment of CHF3.00. This means that it has been growing its distributions at 3.4% per annum over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

Dividend Growth May Be Hard To Achieve

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Let's not jump to conclusions as things might not be as good as they appear on the surface. Nestlé hasn't seen much change in its earnings per share over the last five years.

In Summary

Overall, it's great to see the dividend being raised and that it is still in a sustainable range. While the payments look sustainable for now, earnings have been shrinking so the dividend could come under pressure in the future. The payment isn't stellar, but it could make a decent addition to a dividend portfolio.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for Nestlé that investors need to be conscious of moving forward. 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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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.