Should You Buy Food Giant Nestlé Now?
Over the last couple months, I’ve shown you stocks to avoid…
Stocks to consider buying…
And some of the best stocks related to the coming Internet of Things… Which you can find linked further below.
All these recommendations are to help you either avoid pain and terrible stocks. Or to help you find potentially great stocks to invest in during this pandemic.
If you do both well, it helps you earn higher than average investment returns and build wealth.
Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.
To help you figure out how to protect your retirement portfolio in these uncertain times, today I want to answer – Should You Buy Food Giant Nestlé Now?
Nestlé (NSRGY) is the largest food and beverage manufacturer in the world by sales volume… Yes, even larger than Coca Cola.
It’s a 150+ year old company that is now producing more than $98.7 billion in revenue annually.
Editor’s Note – All the numbers in this article have been converted from Swiss Francs to US Dollars at the prevailing exchange rate where needed.
It now owns more than 34 brands that each generate more than $1 billion in revenue. And it sells products in more than 189 countries worldwide.
In other words, if you live almost anywhere on Earth… You like have something Nestlé in your home, in your body or your pets’ body, or on your body right now.
Some of these powerful brands are…
- Pure Life
- L ‘Oreal
- And many more
Nestlé is so powerful that it withstood the Covid pandemic exceptionally well… While most companies flailed.
Because of this, its stock is up 29.5% from its 2020 low on March 16th to today.
But this is all in the past.
Today, I want to help you figure out whether you should buy it or not for your retirement portfolio now.
It’s based in Vevey Switzerland. It has a $333.41 billion market cap. And it pays you a massive 2.56% dividend. Which is reason #1 to consider buying its stock.
Nestlé’s 2.56% Dividend
Over the last decade Nestlé’s paid out a total of $24.23 per share in dividends.
At today’s share count of 2.849 billion shares that’s equal to $69.03 billion paid out to shareholders in that time.
It also grew its dividend 50.3% from $1.97 per share in 2011 to $2.96 per share now.
These dividend payments will help you in normal times earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
These regular payments will help you earn more money for your retirement. And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.
It can do this because it earns massive profits. Which is reason #2 to consider buying Nestlé for your retirement portfolio.
Nestlé Earns Massive Profits
Over the last decade it earned an average operating income margin of 16.3% per year.
I look for anything above 10% so this is great.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 10.8% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above. If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.
Nestlé farsurpasses both thresholds which means it’s a world class business operation.
Because of these huge profits and world class operations it also has low debt levels too…
Nestlé Has Low Debt
As of this writing Nestlé has $5.79 billion in cash compared to $42.08 billion in debt.
As a percentage of its balance sheet total liabilities make up only 62.9%.
Debt makes up only 12.6% of its market cap.
And its debt-to-equity ratio is an ultra-low 0.87.
These are all well below the minimum thresholds I look for when considering an investment. As one example I look for debt-to-equity ratios below 1.
And this gives owning NSRGY stock a huge margin of safety right now.
So far, Nestlé looks like a great stock to buy… But what about its valuation? Is it cheap enough to buy?
Nestlé IS NOT Cheap…
With the markets at or near all-time highs you might expect a giant like Nestlé to be selling at an enormous valuation.
Unfortunately, it is.
As of this writing its P/E is 25.5.
Its P/CF is 21.7.
Its forward P/E is 24.6.
And its enterprise value to operating income – EV/EBIT is 22.7.
On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
These metrics combined show that Nestlé is massively overvalued right now.
And this means owning its stock does not give you a large margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With Nestlé being overvalued right now, its stock does not offer you a large margin of safety.
This means you should avoid buying its stock right now even though otherwise its fantastic.
If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – Avoid Nestlé until its cheaper. And consider investing in one of the stocks below instead.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.
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