Nestlé to Buy Starbucks Grocery Pipeline

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Last week rumors could be heard that Nestle (NYSE: NSGRY) wants to acquire Starbucks (NYSE: SBUX) Grocery Pipeline which include products such as coffee beans and drinks in supermarket, but it does not include the Seattle-based stores. Today, Nestlé confirmed that they will pay Starbucks $7.5 billions for the rights to market Starbucks’s products around the world. In so, Nestlé has taken another step forward to being the dominant coffee-player in the world.

Starbucks said says that they will use the money to increase buy-backs and Nestlé will see this effects of this purchase by 2019.

Few companies can come close to Nestlé in terms of being a dominated high-quality business. The company is primary a nutrition, health and wellness company with a tremendous pipeline. The pipeline consists of cooking aids, nutrient and health science, milk-based products and ice cream, pharmaceuticals, baby foods and cereals. In so, most of the products you see in supermarkets are owned by this Swizz company founded in 1866, and most likely, this will be the case in the future too.

Consistent Dividend

One should respect Nestlé as a robust financial money-machine. During the last 10 years, Nestlé has generated a positive cash flow and has paid an uninterrupted dividend for 23 years in a row.

A great way to understand the timelessness of a company is to look at how the sales and earnings were affected by the recent financial crisis. Since Nestlé belong to the consumer staples category, one should expect sales to be quite stable since the products they sell are something people need no matter what. People need to eat and all that. During the financial crisis, Nestlé sales were down around 13% which makes sense since some of the products, such as ice-cream and health and nutrient products sells less when peoples spending decreases.

However, the company had no problem paying its shareholders their dividend and this should be the case in the future too. The payout ratio is close to the average at 70-80% and the dividend yield is close to 3% which is in line with the 10-year treasury yield.

During the past few months, we have seen consumer stocks falling down week after week due to the combination of higher 10-year treasury yield and a somewhat huge debt load. In Nestlé case, the Net Debt/ EBIT ratio is 1.2X and is inline at with what we prefer see (under 2) and the debt/equity is 0.43 which also is highly acceptable (under 1 is what we aim for). We can therefore conclude the that debt issue doesn’t really play a threat to this company and in so, one would do good by putting Nestlé high up on “buying list” if the market were to crash.

One can expect even further revenue growth for this great company looking to dominate the consumer staple sector for decades to come.

Disclaimer: The author owns no shares in Nestlé