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. 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, Zone Europe, Middle East and North Africa, Zone Asia, Oceania and sub-Saharan Africa, 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.
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.
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
Objectives and Research Focus
The primary objective of this paper is to perform a comprehensive corporate financial analysis of Nestlé S.A. through a series of quantitative and qualitative tests. The research aims to evaluate Nestlé's financial performance, capital structure, and investment quality to determine if the firm's current financing and dividend strategies optimize shareholder value.
- Corporate governance and ownership structure analysis.
- Estimation of cost of equity and cost of debt using capital market data.
- Evaluation of investment quality via Return on Capital (ROC) and Economic Added Value (EVA).
- Assessment of the optimal financing mix and potential for leverage adjustments.
- Examination of dividend policy and free cash flow to equity (FCFE) sustainability.
Excerpt from the Book
11.2 Added Discipline of Debt
The shareholder structure gives a hint in order to judge Nestlé’s benefits of using debt as a disciplinary mechanism. The benefits should be highest at Nestlé, where there is a clear separation between ownership and management. While institutional stockholders own a significant percentage of the company, no individual stockholder or institution is large enough to have much say in management (<0.1), see 3.2. Nestlé has significant cash flows and should gain from the debt use.
Summary of Chapters
1 Introduction: Provides an overview of the company profile of Nestlé S.A. and defines the structure of the financial analysis.
2 Application Test 1: Who’s on Board?: Evaluates the board of directors' composition, independence, and the firm's governance score.
3 Application Test 2: Who is the Marginal Investor of Nestlé?: Analyzes the ownership structure and identifies the marginal investor based on top shareholder profiles.
4 Application Test 3: Estimating Nestlé’s Market Risk Premium: Calculates the risk-free rate and the weighted equity risk premium based on geographical revenue distribution.
5 Application Test 4: Analyzing the Risk Regression: Executes a risk regression of Nestlé stock against the S&P 500 to estimate historical beta and performance.
6 Application Test 5: Estimating a Bottom-up Beta: Derives a more precise beta for Nestlé by aggregating business unit components.
7 Application Test 6: Estimating the Cost of Debt: Determines the cost of debt using actual bond yields and synthetic ratings based on interest coverage.
8 Application Test 7: Estimating Market Value: Computes the market value of equity and debt to determine the appropriate weights for capital structure analysis.
9 Application Test 8: Estimating Cost of Capital: Calculates the weighted average cost of capital (WACC) using the previously estimated levered beta and cost of debt.
10 Application Test 9: Assessing Investment Quality: Assesses investment performance by calculating Return on Capital (ROC) and Economic Added Value (EVA).
11 Application Test 10: Would you expect your Firm to gain or lose from using a lot of debt?: Performs a qualitative trade-off analysis regarding tax benefits, bankruptcy risk, agency costs, and flexibility.
12 Application Test 11: The optimal Financing Mix of Nestlé: Estimates the optimal debt ratio and its projected impact on firm value and stock price.
13 Application Test 12: Getting to the Optimum: Discusses the strategic path for Nestlé to reach its optimal capital structure through gradual leverage and share buy-backs.
14 Application Test 13: Choosing your Financing Type: Analyzes appropriate financing instruments regarding duration, currency, and interest rate structures.
15 Application Test 14: Estimating Nestlé’s FCFE: Estimates the Free Cash Flow to Equity (FCFE) to evaluate the company's dividend payout capacity.
16 Application Test 15: Assessing Nestlé’s Dividend Policy: Reviews the consistency and sustainability of Nestlé’s dividend policy over the past five fiscal years.
Keywords
Nestlé, Financial Analysis, WACC, Beta, Cost of Equity, Cost of Debt, Corporate Governance, Capital Structure, FCFE, Dividend Policy, Return on Capital, Economic Added Value, Shareholder Rights, Investment Quality, Risk Regression
Frequently Asked Questions
What is the primary purpose of this analysis?
The paper performs a detailed corporate financial analysis of Nestlé S.A. to evaluate its financial health, capital structure, and to determine if its current strategic financial decisions are creating value for shareholders.
What are the central themes of the work?
The core themes include risk assessment, optimal capital structure, investment quality measurement, and the sustainability of the company's dividend policy.
What is the primary research question?
The research asks whether Nestlé is optimally financed and how it can effectively manage its cost of capital and shareholder distributions to maximize firm value.
Which scientific methods are applied?
The study utilizes standard corporate finance methodologies, including CAPM for cost of equity estimation, regression analysis for beta calculation, ROC/EVA for investment quality, and Damodaran's models for capital structure optimization.
What does the main body cover?
The main body systematically works through fifteen application tests covering everything from governance and beta estimation to the computation of FCFE and the assessment of dividend stability.
What keywords characterize the work?
The work is characterized by financial terms like WACC, Beta, FCFE, Capital Structure, and specifically focuses on the multinational consumer goods environment.
What is the result of the optimal financing mix test?
The analysis concludes that Nestlé is currently underlevered, suggesting that moving to a 30% debt ratio would potentially increase the firm's value by approximately CHF 4,898 million.
How is Nestlé's investment quality assessed?
Investment quality is assessed by comparing the Return on Capital (ROC) against the WACC, confirming that Nestlé’s projects generally yield positive Economic Added Value (EVA).
- Quote paper
- Viktoria Schwarz (Author), 2018, Nestlé. A Corporate Financial Analysis of a Multi Million Dollar Company, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/441417
