Capital Markets

Huge Nestle Buyback Is Sweet to Investors

A surprise $21 billion repurchase plan, its largest ever, helps lift the diversified company's stock 7.5 percent, but presages less M&A.
Roy HarrisAugust 15, 2007

Nestle SA surprised investors by announcing the largest share-buyback plan in its history — for $21 billion — which along with a glowing sales-and-earnings forecast set off a 7.5-percent rise in its share price.

The share-price rise registered in Zurich for the diversified Vevey, Switzerland-based food-products giant was its sharpest gain since July 2002, and by adding 12 percent for the year-to-date, Nestle stock is beating the 4.2-percent climb by Dutch rival Unilever, according to a Bloomberg News report.

Nestle CFO Paul Polman had said in June that investors shouldn’t expect repurchase programs every year, the news service noted, making the current announcement quite unexpected. Still, it was only the latest of a series of giant buybacks announced by companies around the globe, including Procter & Gamble.

The acquisitive Nestle suggested, however, that the buyback plan in part is a substitue for buying companies in a current environment that is hostile to acquisitions. “I don’t see now, into the future, any major acquisition,” CEO Peter Brabeck-Letmathe said in discussing the Nestle report, according to Bloomberg.

In talking to analysts about how Nestle had beaten analyst projections for first-half earnings with an 18-percent rise, Polman also said full-year revenue would exceed forecasts. In a conference call, he said that sales in the latest quarter had risen 7.4 percent excluding acquisitions, disposals, and currency translations, and added that full-year revenue growth would be “approaching” 7 percent, up from Nestle’s previous full-year forecast of between 5 and 6 percent.

CEO Brabeck-Letmathe said that profit margins will also improve, based on price increases of its Dreyer’s ice cream and Friskies pet food. Record health-food sales increases, reflecting the company’s purchase of Gerber baby foods and another Novartis AG unit for $8 billion, are helping, according to the Bloomberg report.

Bloomberg quoted analysts who were ecstatic about the Nestle report and buyback plan. “Brabeck delivered again,” said the chief investment officer of Frankfurt-based Allianz Global Investors, Joerg de Vries-Hippen. “I have been looking at Nestle for 15 years and I have never seen anything like this.”

The buyback will take place over three years, and could amount to a repurchase of 15 percent of the company’s shares, based on yesterday’s closing price, Bloomberg calculated.