Shareholder wealth maximisation – Nestlé promises HUGE returns.

Blog 1 - 27/10/2019

Value based management is gaining momentum and shareholder wealth optimization is becoming integrated into the everyday decisions of corporate’s operations, ensuring the directors of the company are always acting in favour of the owner’s interests (Arnold, 2013). Shareholder wealth maximisation is a superior objective for corporates operating in a competitive environment, often because owners of a business, aka the shareholders, have the right to demand that this objective is met (Arnold, 2013). All’s fair when you’re financing the business I guess? A company recently stepping on the bandwagon of shareholder wealth is Nestlé, promising a total return of $20.2bn over the next 3 years (Abboud, 2019).


Source: Simply Wall St.

In the above diagram you can see the level of which dividends are paid to shareholders, at 78% of earnings, it appears to be extremely favourable to shareholders. 

In a recent article published in the Financial Times it was credited to the chief executive, Mark Schneider, who is said to have reformed Nestle to gather pace and aims to raise sales growth and profit margins, and in turn return these huge dividend promises of $20.2bn. However, shareholder wealth can sometimes come at a cost, a choice to limit R&D due to the lack of profit being reinvested, or in the case of Nestle selling off certain businesses which are ‘No longer central to Nestlé’s strategy’ (Abboud, 2019). Although, this may benefit all areas, selling off business that no longer benefit the corporation and in turn being able to pay back huge dividends to shareholders, a win-win surely? Nestlé has always been known to be a serial buyer and seller of businesses that no longer benefited their strategy to target the current consumer trends, and now clearly are only opting for value-creating opportunities to keep dividends per share up and profit margins high. Mr Schneider is said to be a bit of an aficionado when it comes to mergers & acquisitions, having become a renowned dealmaker at his last business Fresenius SE, where he transformed the company through the use of 30 acquisitions, making it the leading operator within its private health clinic market. The game of acquisitions is potentially risky if it is a company whom need great reform, however Mr Schneider has proven that when the business is correctly selected and it is a willing buyer and seller involved then it can lead to great things and huge successful corporates. And... you guessed it - return value to those all-important shareholders.

Although, shareholder wealth maximisation cannot of course be the only strategic goal of a company. BUT, shareholder wealth holds hands with many other achieved goals and they really are synonymous. If a company improves its profit margins...hello more money for shareholders! Greater market shares and higher sales figures = satisfied shareholders. Even if these profits are reinvested into the company; forgoing immediate dividends, if this money is allocated properly into the correct new projects then shareholders, again, are able to make it rain with the cash they're gaining through a successful company's growth. There are however, certain arguments against the way in which Nestlé are currently managing their global enterprise. Billionaire investor Daniel Loeb from the fund management company Third Point, argues that despite being vocally supportive of CEO Mark Schneider in the past, he believes that the company may run into trouble if the complex structure does not get simplified (Herbst-Bayliss, 2018). Despite the fact that many other financial bodies have praised Nestlé for its high performance, Mr. Loeb believes that there is call for urgency and not just incremental changes but immediate, this must set alarm bells ringing for investors to hear this from an experienced fund manager. However, Mr. Loeb supports Nestlé's current selling off of business that no longer suit its core focus and in fact encourages that Nestlé partake in a more centralised focus immediately (Herbts- Bayliss, 2018). He goes on to say that Nestlé is complacent and overly complex, missing too many trends, and is far too bureaucratic, none of which reflect the company in a particularly favourable light, especially to future investors.

In regards to Nestlé’s growth, in 2019 they reported their highest half yearly sales growth since 2015. (Georgiadis, 2019) Also, reporting a trading profit margin rise of 17.1%, proving that Nestlé were on the up, achieving Mr Schneider’s goal of improved profit margins and sales figures. Mr Schneider states that he believes his focus on innovation has begun to pay off, proven by the increase in profit figures, he’s doing something right surely? (Georgiadis, 2019)

As demonstrated within the graph, in the CEO's 3rd year, shares have soared proving that his ability to enter a company and transform it into a well performing corporate are unfaltering. In regards to earnings per share, this is also something that leads investors to only opt for investment in profitable business, Nestlé's EPS is an example of year on year improvement, and an 18% growth figure that I'm sure would incur no complaints from shareholders (Yahoo Finance, 2019). It appears that there is a vast amount of insider shareholdings, which is certainly reassuring for those investing in it as it's almost certain that any decision made by management will be in favour of shareholder's interests (Yahoo Finance, 2019).

Nestlé appear to have hit the nail on the head when considering shareholders. They promise dividends and always appear to come through on that promise, but they also never fall short on reinvestment. Long-term projects always seem to be a focus in Nestlé, along with plans for acquisitions and higher investment projects, however surely the investment in these projects contributes to the long term success of the company? So if you’re not in a rush to sell your shares to make short term cash, then long-term investment in Nestlé could really pay off; especially considering Mr Schneider appears to only just be starting out with his restructuring revolution and is already making great changes. However, throughout today’s post, we’ve highlighted the ways in which Nestlé encompass shareholder wealth and also pitfalls in which they may fall into and lose their current great performance. All, in all, if a company is performing well, it’s likely shareholders will be happy, but it’s always important to have them as a key focus point…they are after all the ones with the capital! 

Bibliography

Abboud, L. (2019, October 17). Nestlé to return $20bn to shareholders as turnround gathers pace.Retrieved from Financial Times : https://www.ft.com/content/564ac492-f0a4-11e9-ad1e-4367d8281195

Georgiadis, P. (2019, July 26). Strong US performance boosts sales at Nestlé.Retrieved from Financial Times : https://www.ft.com/content/f2ad46d0-af6c-11e9-8030-530adfa879c2

Gretler, C. (2019, October 17). Nestle to Return $20 Billion to Investors.Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2019-10-17/nestle-to-return-20-billion-to-investors-as-sales-increase

Herbst-Bayliss, S. (2018, July 1). Loeb pressures Nestle for more sales, restructuring.Retrieved from Reuters: https://www.reuters.com/article/us-nestle-thirdpoint/loeb-pressures-nestle-for-more-sales-restructuring-idUSKBN1JR26K?utm_source=applenews

Simply Wall St. (2019). Nestlé - Stock Analysis Report.Retrieved from Simply Wall St. : https://simplywall.st/stocks/gb/food-beverage-tobacco/lse-0qr4/nestle-shares#dividend

Yahoo Finance . (2019, July 31). If You Like EPS Growth Then Check Out Nestlé (VTX:NESN) Before It's Too Late.Retrieved from Yahoo Finance: https://uk.finance.yahoo.com/news/eps-growth-then-check-nestl-074237248.html