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Nestlé. A Corporate Financial Analysis of a Multi Million Dollar Company

Seminararbeit 2018 33 Seiten

BWL - Unternehmensforschung, Operations Research

Leseprobe

Table of Contents

1 Introduction
1.1 Nestlé’s Company Profile
1.2 Structure of Paper

2 Application Test 1: Who’s on Board?
2.1 Nestlé’s Board of Directors
2.1.1 The Constitution of the Board
2.1.2 Independence of the Board
2.2 The ISS Governance Score

3 Application Test 2: Who is the Marginal Investor of Nestlé?
3.1 Top Shareholders

4 Application Test 3: Estimating Nestlé’s Market Risk Premium
4.1 The Risk-Free Rate of the CHF
4.2 The Equity Risk Premium

5 Application Test 4: Analyzing the Risk Regression
5.1 Estimating Historical Risk Parameters (Top Down Betas)

6 Application Test 5: Estimating a Bottom-up Beta
6.1 Unlevered Beta: based on Historical Beta
6.2 Unlevered Beta: based on Sector Betas
6.3 Choosing between Betas

7 Application Test 6: Estimating the Cost of Debt
7.1 Bond Rating of Nestlé
7.2 Company Rating of Nestlé
7.3 Synthetic Rating of Nestlé
7.4 Pre-tax and After-tax Cost of Debt of Nestlé

8 Application Test 7: Estimating Market Value
8.1 Estimating Market Value and Book Value of Equity
8.1.1 Market Value of Equity
8.1.2 Book Value of Equity
8.1.3 Book Value of Debt
8.1.4 Market Value of Debt
8.2 Weights for Equity and Debt
8.2.1 Based upon Market Value
8.2.2 Based upon Book Value

9 Application Test 8: Estimating Cost of Capital
9.1 Bottom-Up Levered Beta
9.2 Cost of Equity
9.3 Cost of Capital

10 Application Test 9: Assessing Investment Quality
10.1 Computation of Return on Capital (ROC)
10.2 Computation of Return Spread
10.3 Computation of Economic Added Value (EVA)

11 Application Test 10: Would you expect your Firm to gain or lose from using a lot of debt?
11.1 Tax Benefit
11.2 Added Discipline of Debt
11.3 Bankruptcy Risk
11.4 Agency Costs
11.5 Future Flexibility
11.6 Qualitative Judgment

12 Application Test 11: The optimal Financing Mix of Nestlé
12.1 Financing Mix at Nestlé
12.1.1 Nestlé’s optimal Debt Ratio
12.1.2 Nestlé’s new Cost of Capital
12.1.3 The effect on the Firm Value
12.1.4 The effect on the Stock Price
12.2 Mechanics to get to the Optimum

13 Application Test 12: Getting to the Optimum
13.1 Mapping out Nestlé’s Path

14 Application Test 13: Choosing your Financing Type
14.1 Duration
14.2 Currency
14.3 Fixed or Floating Rate
14.4 Straight or Convertible

15 Application Test 14: Estimating Nestlé’s FCFE
15.1 Nestlé’s FCFE
15.2 Comparing Nestlé’s FCFE to Dividend Policy

16 Application Test 15: Assessing Nestlé’s Dividend Policy

16.1 FCFE and Dividend Measure for the past Five Years

II. List of illustrations

Figure 1: Nestlé versus S&P 500 (05/2013-05/2018 monthly basis)

Table 1: Constitution of Nestlé’s Board

Table 2: Board Members of 2018

Table 3: The ISS Governance Score of Nestlé

Table 4: Top 15 by % of Shares Outstanding Held

Table 5: Top Ownership Type (%)

Table 6: Revenue Breakdown and Equity Risk Premium Nestlé

Table 7: Regression Results

Table 8: Nestlé’s Weighted Average Business Unlevered Beta

Table 9: Nestlé’s Bond Rating

Table 10: Nestlé’s Cost of Debt based on Actual Rating

Table 11: Nestlé’s Cost of Debt based on Synthetic Rating

Table 12: Present Value of Nestlé’s Operating Leases

Table 13: WACC with Book Values vs. Market Values

Table 14: Nestlé’s Capital Structure Analysis

Table 15: Change in Firm Value along the different Debt Ratios

Table 16: FCFE Nestlé FY 2017

Table 17: Nestlé’s Dividend Policy FY 2017

Table 18: FCFE Estimation and Dividend Policy of Nestlé for FY2013-FY2017

1 Introduction

1.1 Nestlé’s Company Profile

The 1866 founded transnational Swiss company Nestlé S.A. operates as a nutrition, health and wellness company, headquartered in Vevey, Vaus, Switzerland.

By providing over 2000 brands Nestlé is considered the world’s largest food and beverage company measured by revenues and further metrics. Seven product categories can be distinguished:

- Powered and liquid beverages
- Nutrition and health science
- Milk products and ice cream
- Pet care
- Prepared dishes and cooking aids
- Confectionery
- Water

As of 2018, Nestlé is present in 189 countries, operates 413 factories in 85 counties and employs around 323.000 employees. The company is operating through the following operating segments: Zone Americas (AMS), Zone Europe, Middle East and North Africa (EMENA), Zone Asia, Oceania and sub-Saharan Africa (AOA), Nestle Waters, Nestle Nutrition and other businesses. For the year 2017, ending on 31 December 2017, the Nestles total sales were stated CHF 89.8 billion. Nestlé shares are enlisted on the SIX Swiss Exchange in Switzerland. At 31 December 2017, the market capitalization was CHF 25,223,000,000. (Source: Nestlé Global 04/2018)

1.2 Structure of Paper

This is a corporate financial analysis of Nestlé. Throughout various application tests, quantitative as well as qualitative, investigations on Nestlé’s financial performance will be applied. Detailed information regarding the structure can be extracted from the table of contents.

2 Application Test 1: Who’s on Board?

2.1 Nestlé’s Board of Directors

2.1.1 The Constitution of the Board

Nestlé’s board of directors is led by the Chairman Paul Bulcke, who was a former Nestlé CEO. In total there are 14 members comprising the board. The committees that they operate within and an extract of their careers can be found in Table 1. Furthermore, the table states the member’s connectedness to the company by differentiating between dependent/independent directors. As Table 1 states the board of directors ensures a high degree of diversity in regards to education/qualification, professional background, sector expertise etc.

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Table 1: Constitution of Nestlé’s Board

On the one hand, the Board members are active in various industries and obtain high-ranked positions throughout the economy, which leads to widely varied core competence and knowledge. Therefore, the Board of Nestlé can be declared as efficient. Whereas on the other hand, almost every member serves on the board of different companies and holds mandates at the same time. The degree of their commitment to the Nestlé Board may be narrowed. Nevertheless, having various mandates in different boards is current business practice. Nestlé declares in its corporate governance report of 2017 pursuant to art. 21 of the Articles of Association that “no member (…) may hold more than 4 additional mandates in listed companies (…)” (Source: Nestlé Corporate Governance Report 2017, p. 16), to ensure a granted commitment of the Board members.

2.1.2 Independence of the Board

Due to the latest press release as of January 18, 2018 Nestle has nominated three new independent directors to its board. As of today, 12 out of the 14 members comprising the board are independent directors (Table 1). Nestlé has added eight new independent directors in the last three years (Table 2). The continuous refreshment of the Board augments its diversity and experience leading to an excellent rating in the ISS Governance Score in 2.2.

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Table 2: Board Members of 2018

Moreover, the document “Nestlé SA Board of Directors- Board Regulation- April 2018” implies the importance of independence following internal standards and rules of best practice. In order to comply with the Swiss Code of Best Practice for Corporate Governance, “a majority of the Directors and the Lead Independent Director shall be independent.” (Source: Nestlé Board of Directors Regulation 2018, p.16) Independence is furthermore defined as follows, a committee member may not have any executive functions in the Company (look-back period three years) and may not have or have only comparatively minor business relations with the Company. An Annual Self-Evaluation shall perform an annual evaluation of the Board’s independence.

2.2 The ISS Governance Score

The Institutional Shareholder Services (ISS) Governance Quality Score of Nestlé S.A. as of May 24, 2018 is 1 (Source: issgovernance.com 05/2018). The total score of 1 indicates that Nestle has a very low corporate governance risk and is therefore a company with good corporate governance. Companies receive scores ranging from 1 (lowest risk) to 10 (highest risk) for the four corporate governance categories in order to compute an overall score. Nestlé’s pillar scores are resumed in Table 3.

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Table 3: The ISS Governance Score of Nestlé (Source: issgovernance.com 05/2018)

Nevertheless, the score which is striking the most is the significantly high score for the shareholder rights. In terms of shareholder rights, Nestlé seems to have an issue with guaranteeing a good corporate governance. Leading to the question of how much influence do the individual shareholders have and how efficient the annual general meetings are? The above mentioned pillar is taking the following into account: one share one vote, takeover defenses, voting issues, voting formalities and other shareholder rights issues. Nestlé shareholders’ participation is regulated by the voting rights restrictions and representation and follows the one share, one vote principle. However, no person could exercise voting rights in excess of 5% of the share capital as recorded in the commercial register . “At 31 December 2017, the share register showed 157,753 registered shareholders. […]. The company was not aware of any shareholder holding, directly or indirectly, 5% or more of the share capital.” (Source: Consolidated Financial Statements of the Nestlé group 2017, p. 183). In other worlds, the shareholders can’t demonstrate their power to full extend. Shareholder’s behavior in General Meetings can be seen as non-active.

3 Application Test 2: Who is the Marginal Investor of Nestlé?

3.1 Top shareholders

An additional factor to be analyzed in order to classify the corporate governance of Nestlé is the ownership structure. That comes along with the question who holds the majority of the company’s shares? The following Table 4 presents the top 15 shareholders of Nestlé and their relevant percentage of the outstanding shares.

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Table 4: Top 15 by % of Shares Outstanding Held (Source: Bloomberg 04/2018)

The top 15 shareholders hold shares between 3.84%-0.47%. The leading shareholders are Blackrock, an American global investment management corporation, Capital Group Companies Inc., an American investment management organization, and the Vanguard Group, again an American investment advisor. The above mentioned institutions own and trade a considerable amount of Nestlé’s shares. Especially under the circumstances that, as stated in earlier sections, shareholders are only able to hold a maximum of 5% of the company outstanding shares, see 2.2.

3.2 Identifying the Marginal Investor of Nestlé

The vast majority of shareholders at Nestlé are investment advisors with a share of 83.79% (Table 5). This includes the large investment corporations such as Blackrock, Capital Group and Vanguard Group (Table 4). Looking at the distribution of shareholders at Nestlé, the marginal investor is evidently an institutional investor with a well-diversified portfolio. The considered risk for investment decisions is the non-diversifiable risk. The institutional investors are trading to a vast extend and pursue a low risk preference. If the company Nestlé performs poorly, the institutional investors are keen to sell their shares and invest in better options. Inside investors are barely taking part in the shareholder structure of Nestlé (less than 0.5%). Consequently, there are no activist investors within Nestlé’s investors. Therefore, it is unlikely that investors will influence management decision though the annual meeting.

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Table 5: Top Ownership Type (%) (Source Bloomberg: 05/2018)

4 Application Test 3: Estimating Nestlé’s Market Risk Premium

4.1 The Risk-Free Rate of the CHF

The company Nestlé is incorporated in Switzerland, therefore all the company’s computations are made in the Swiss Franc (CHF). In order to determine the risk-free rate one needs to consider the national currency, Swiss Franc. The Swiss 10-year government bond rate has a yield of 0.053%, due to Bloomberg on May 10, 2018. Applying the third approach, estimating a spread based upon a sovereign rating, translates into a local currency rating for Switzerland into Aaa, according to Moody’s. The Aaa rating converts to a default spread of 0.00%, an excerpt of Damodaran’s website. Therefore, the risk-free rate in CHF is 0.053%-0.00%= 0.053%.

4.2 The Equity Risk Premium

Nestlé is a globally active company operating in 189 different countries worldwide. The revenue within the 3 geographical zones in 2017 was CHF 67.3 billion. As I already mentioned under 1.1, Nestlé differentiates in the following geographical zones: Zone Americas (AMS), Zone Europe, Middle East and North Africa (EMENA), Zone Asia, Oceania and sub-Saharan Africa (AOA), illustrated in Table 6.

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Table 6: Revenue Breakdown and Equity Risk Premium Nestlé (Source: Bloomberg 05/2018)

Having gathered the enumeration of the various countries per zone from the Nestlé website, one is able to proceed with the EPR computations. Damoderan’s ctryprem.xls spreadsheet “Estimating Country Risk Premiums” enables to derive the data for the total equity risk premium by geographical zones. The spreadsheet got lastly updated January 1, 2018. This is a weighted average of the countries located in their individual zones. In the final analysis, Nestlé’s total weighted Equity Risk Premium is 8.43%. See computation of ERP by zone in the Nestlé worksheet.xlsx in the sheet ERP.

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Titel: Nestlé. A Corporate Financial Analysis of a Multi Million Dollar Company