Since its peak at around 130 CHF per share and a market cap of almost 400 billion CHF, consumer staples heavyweight Nestlé has highly disappointed its fan base of predominantly defensively oriented investors. Who’d have thought that THE core investment in the consumer staples sector (besides Coca-Cola) could see its stock price get almost cut in half? Although I have not written a weekly about Nestlé so far, my readers know that Nestlé has not been interesting all the time. Is it now worth a look?
Summary and key takeaways from today’s Weekly
– Nestlé is a stock that has made many investors scratching their heads
– The company fits well into my “avoid consumer stocks” basket
– Today, I take a look at the company to answer the question whether an almost 50% drop is too much
Among the topics where I have been highly skeptical for quite some time, stocks of consumer staples can clearly be found. This highly loved and closely followed sector, for its seemingly defensive characteristics, however, has been a major surprise for investors who ignore valuations. And demographics (see here).
The only practically guaranteed thing was extreme underperformance.
But not in the sense of returning a few percentage points less than broader markets with dividends adding a bit. The cold bitter truth is, most pretend defensive consumer stocks have been experiencing an almost unprecedented, harsh bear market. Most of the big names have seen their shares declining by fat double-digit figures.
The cherry on the cake likely is that what is often seen as THE core holding among consumer, respectively food stocks, Swiss giant Nestlé (ISIN: CH0038863350, ticker: NESN) saw its stock declining from close to 130 CHF to 70 CHF in almost precisely four years — a decline of 47%.
Hardly anyone will shrug this off, celebrating the pocketed dividends.
As many investors wonder whether and when Nestlé equities could finally be interesting, I decided to write a weekly about it.
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both as per 17 December 2025 market close – since August 2022
The Setup is still not crunchy
To not raise the tension artificially: Nestlé stock still does not convince me.
Just like with most other consumer equities, I continue to have the (still highly contrarian) view this group has not fallen from fair value to bargain territory.
Instead, my perspective is that only the previous excess has been corrected — with most of these stocks now likely trading somewhere around their fair value.
At best.
This does not apply to all of them, and it does not guarantee that shares could not fall further. Quite the opposite. With demographics against them, fully levered balance sheets, the end of zero interest rates (except in Switzerland), and what I view as a “dividend burden”, I was not able to find enough value in consumer staples stocks from the food and beverage sector.
For my long time readers this is cold coffee — but I cannot repeat the things from this intro often enough, as there are in my view still too many people being surprised about these developments.
What I am still missing is facing the new reality and a harsh washout. This could happen when one or other big name finally cuts their dividend — as my readers know, dividend cuts are something I view as a mega trend for this decade. I stick to my guns.
There are simply too many red flags.
The financials look weak — but when in doubt they tell you more about the objective, true underlying condition of a company than forever-optimistic CEOs who promise to defend a decades-long dividend series while playing down structural issues by calling them “just cyclical”. However, no one can explain to me why these pretend defensive and not cyclical names suddenly are finding themselves in “cyclical” downturns…
A colossal mistake in my view — both, this view and the artificial holding up of dividends, wasting time and financial resources.
This is likely what is still missing to shift the focus from unnecessary cash outflows for dividends (and sometimes buybacks, though these have already been strongly reduced) towards strengthening and cleaning up the balance sheets.
Speaking of cleaning up, although not a food or beverage company, I did find at least one valuable idea for all my paid members last summer.
A practically unknown market leader in Europe for cleaning and washing supplies that retail investors do not talk about, despite the company having been a beneficiary of the cost-of-living crisis.
And despite many Europeans holding their products in their hands on a daily basis.
Including the (as expected) reinstated dividend, this defensive pick is up 17% over four and a half months — more than 2x the S&P 500.
Even though I sound like a broken record, the valuation of a stock is critical to fetch an attractive setup from a risk and reward perspective. Forget this quality premium nonsense. If you have practically not growing companies trading for 30x PE ratios (before taking debt into account), you can be almost sure the returns over time will be abysmal, if not highly negative like in this case.
Nestlé has seen a strong boost during the lockdown years. But the stock is now down to where it was in 2016, having returned over the last ten years on a price level 8% (not per annum, in total!) — a lost decade. And for those who bought at the top, assuming what goes up will go up forever, not even the dividends make this case appear better.
In my view, a final cleanup is what’s still missing at Nestlé, as I will show now.
The Swiss giant barely needs an introduction, but in brief, the company is selling Powdered and Liquid Beverages, PetCare, Nutrition and Health Science, Prepared dishes and cooking aids, Milk products and ice cream, Confectionery as well as Water.
In total, Nestlé has seven segments. The order of listing was from biggest sales generator to smallest. And in fact, the non-core and low-margin, but highly-criticized water segment has been rumored to be on the sale rack for quite some time.
The company is doing business in over 185 countries, i.e. practically all over the world.
Here is an overview of their portfolio and key brands.
It is likely safe to assume that most of us in one or the other form have a few of their products at home, willingly or not. The company has such a broad reach that it is hard to escape them, especially if one is not aware that they hold certain brands in their portfolio.
Just as a side note, this for example happened to me with a few Polish brands (so I thought) which my grandparents and parents still think they are Polish — but Nestlé owns them. Two examples are Winiary (iconic culinary brand with soups, sauces, seasonings, mayonnaise; acquired 1995) and Princessa (popular chocolate wafer bar; acquired in 1994).
It is very likely many of us have some coffee products at home or at work. And this is no coincidence. The by far most important segment is Powdered and Liquid Beverages, and within it the coffee offerings of Nescafé, Mövenpick, and Starbucks. Yes, the latter was bought by Nestlé for retail sales (not the Starbucks restaurants / cafés).
This segment generates around 30% of sales and it has grown the strongest by volume (RIG = Real internal growth) and Pricing, for total growth of almost 10% recently.
Even though there are a few, though modest, negative figures in the table above, generally speaking Nestlé is not even doing that bad operationally.
I mean this seriously, as an organic growth rate of 4.3% for the entire company is surprisingly strong, especially compared to other food and beverage companies. However, this is mainly driven by the coffee segment, as it is the biggest by sales (by far) as well as the by far fastest growing.
The second biggest segment, maybe a bit surprisingly for one or the other reader, is PetCare. It is no secret that pets as life companions have been a bullish theme over the last decade or so. But the cost of living aspect hits hard. Pricing power is eroding in this segment, not just for Nestlé, but also among it competition.
With 50% of sales coming from these two segments, Nestlé turns out not to be the typical food company many think it is.
Anyway, jumping to the big picture, Nestlé has not been able to grow over the last entire decade when looking at the reported figures. Sales practically moved sideways and only experienced a minor bump with the inflation wave.
But they have been falling again since 2022.
This is the result of constant and ongoing portfolio reshuffling as one reason. They buy promising brands at a premium, and sell below-average or underperforming ones later.
On the sales front, the company does not seem to be able to pull forward. Keep in mind the sales figures above were organic, meaning on a comparable basis, adjusted for transactions.
But there’s more to it.
Zooming in on a quarterly, trailing twelve month basis, we can see that after the inflation bump in 2022, growth rates faded away again quickly. For the last two years, total sales were even negative.
If we convert the reported figures to USD, we can see that the latest readout even shows a record-high. The reason: The Swiss Franc has appreciated strongly, pressuring Nestlé’s results which are reported in CHF.
On the other side, shareholders outside of Switzerland are making currency gains with their investments, so that I am seeing this factor rather neutrally. But I wanted to have mentioned that.
On the margin front, we can see that there seem to be issues. Gross margins fell when inflation pushed costs, but it has been falling again as of lately, indicating pricing power is not fully there.
Similar for operating margins.
Looking at operating cash flow, again in CHF, we see it dropped rather strongly. But unlike sales, operating cash flow in USD has not made a new high.
For me this means, the company is operating in a tough environment, not being able to offset rising input costs fully through price hikes. Working capital effects were small and are not an explanation.
Similar, but a bit worse for free cash flow which is pressured by higher investments which have risen by 30% over the last five years.
I expect all the above to continue.
The company will try to acquire new growth avenues, while disposing weaker areas, likely water next. But this will likely continue to balloon the balance sheet with intangible assets and goodwill.
Total equity in orange has been falling for reasons I will explain soon.
But notice here how goodwill plus other intangibles together with 45 billion CHF clearly outscore equity of only 29 billion CHF. Plenty or write-down potential / risk.
The reason why equity has shrunk so strongly were not losses in the P&L, but aggressive debt accumulation and share buybacks, which together with the dividend were higher than generated cash flow.
Net debt has reached 60 billion CHF. That’s quite a chunk, even for a company like Nestlé, especially as it has been used absolutely stupidly in my view.
Namely to a big part for buybacks at high multiples.
How do I know? This is easy to check. Below, I framed here the highest buyback activity in CHF was, during 2022. You will also notice the latest buybacks have been the lowest over this entire period of five years.
Now, let’s please take a look again at the stock price chart over the last five years.
I placed the pointer on the year-end of 2021.
Extreme weak capital allocation skills.
Not to say, absolutely waste shareholders money. But was left, is a highly levered balance sheet, one of the main reasons why I do not likely this company from an investment perspective.
Net debt to free cash flow is 6x, which is very high, even for this company.
These 60 billion CHF in net debt plus the current market cap of 203 billion CHF, for an enterprise value of ~260 billion CHF, compared to a FCF of rounded up 10 billion CHF — or a multiple of still what I view extremely expensive 26x. In other words, the currently expected return is 4% plus growth. However, I am not so sure about the growth factor.
However, one aspect is missing in this calculation.
Nestlé is the second-largest holder of L’Oréal stock, the world’s biggest beauty and cosmetics giant. The company has a market cap of 200 billion EUR and is practically debt free. 20% of this, converted into CHF results in an equity stake of 37–38 billion CHF.
Sounds like a potential game changer, but taking it into account does not really change much. Whether Nestlé’s assumed EV is 260 billion CHF or 220 billion CHF — the company still trades at a premium, having priced in lots of growth I do not see. To the contrary, on the latest conference call accompanying the Q3 sales update, management said further market share losses are unacceptable, thus the company will increase its marketing spend.
In other words, I would not expect too much.
In the current environment, private-label brands see strong tailwinds, not overpriced branded products. Consumers know that, so more ads for Maggi or Nescafé in view have limited influence if consumer budgets are tight.
And, if Nestlé were to sell this stake, I am not sure they will be able to fetch the current price. This makes it more a theoretical exercise. The best it does is it makes the company’s high leverage at least theoretically more digestible.
But under practical standpoints, the stock remain much too expensive for me.
Despite the 50% drop.
Closing with the question about dividend safety: Currently, it is safe. But I would not expect big increases. The company will likely dial down or even entirely stop buybacks — at ten-year lows — to protect the dividend. The buffer is sufficient with 9.3 billion CHF in FCF and 7.8 billion CHF for the dividend.
But why stressing so hard for a yield of 4%?
Not my case. I expect weakness to persist, the upside to be limited, and if inflation remains sticky, sooner or later the dividend could be questioned. But this is not a topic for the near term.
Conclusion
Nestlé is a stock that has made many investors scratching their heads
The company fits well into my “avoid consumer stocks” basket
Today, I take a look at the company to answer the question whether an almost 50% drop is too much
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