Saturday, April 7, 2012

Nestle: Great companies are expensive

If you are 40 - 50 years of age (or more) and in Malaysia, do you remember Ovaltine? What about Indocafe? Were you the ones who preferred Cintan over Maggi? What happened to them now - these brands are still around BUT just that they are now way overwhelmed by Milo, Nescafe and Maggi.

Think of it this way, as a business owner would you rather own a Milo or an Ovaltine brand (assuming they are sold to you at the same valuation, not price)? Unless, you have the confidence and ability to turnaround the Ovaltine business, the effort to push for its success almost end up in futility. It is almost always much harder to turnaround a failed (or struggling) brand than to manage a successful one for consistent growth. Of course any self-confident investor would prefer to stumble upon great and fast-growth companies such as Facebook, Google, Microsoft, Apple at an early stage - but seriously we are looking at investment as a part time job. Most professional firms which invest into early start-ups are seldom successful anyway.

So how do you as a busy working adult with some savings tend to look at your investment opportunities? You look for great companies. The biggest issue is that great companies tend to be expensive. Look at the below statistics specifically on the Price Earnings line for Nestle.

Except for 2008, the year where most investors grapple for safe haven investments such as gold, government bonds, Nestle's PE was never below 20. The lowest it went was 18.5x, and highest most recent year, 2012 - almost 29x. In fact, I have looked further up to as early as 2001, the PE was never below 20x. Just look at the trend below.

Three other lines which you will want to notice are the Profit After Tax (PAT), Cash Flow and dividend yield. Nestle has superb PAT and Cashflow growth for a mature company while dividend yield which tracks its dividend payment against price is above Fixed Deposit yield in Malaysia.

Hence what does that tell you? Even at its most expensive period like now, you are almost assured of buying into a company that is to have a continuous growth in future while it continues to pay a good dividend to you as an investor. Yes, for the more aggressive investors, Nestle is a boring stock but for the person who do not have much time doing research, Nestle is one company which you do not have to do research. You can almost be assured that this is one stock which provides the natural hedge against inflation, recession and any other calamities.

And yes, it is expensive - so are diamond and gold (for those who is buying gold as a natural hedge against inflation and currencies depreciation)! As Warren Buffett says, would you buy something which you can only fondle but does not do much beyond that?

I wonder fondling a piece of gold bullion ever becomes a hobby...

I recently bought a bottle of IndoCafe (cause for whatever reason Nescafe was not available) - did not like the taste anymore - I am now starting to believe that taste is most of time acquired.

Serious Investing! 

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