It’s Nestlé Dividend Day for American Stockholders!

I would like to see you compare this planned blue chip analysis to an investor who just invests in a low cost index find of the total us stock market like we have seen suggested on this blog many times. It would be good to see the comparison of holding the entire market vs holding 30 dividend paying companies.

You know that you could do this yourself right?

Of course, however there have been times where you advocate low expense ratio index funds over picking individual stocks. It has gone both ways.
If I recall correctly you once posted your personal portfolio percentages over an industry average over the last 5 years or so.
For many investors, Even professional ones. I would bet many cant beat the index they are so often held against.

If anything I hope it gives you some writing ideas to show how similar returns are (or not be) investing in the benchmark vs using the dividend discount model.

You realize the Joshua to whom you are responding, and who left this comment for you, is not me, the site owner, right? I haven't had a chance to write back to you, yet.

I always show up with my full name, picture, and a Moderator badge next to my name.

Hah, No. I had suspicions based upon the curt conjecture but could not tell for sure. Thanks for clarifying.

Haha, no I'm definitely not Joshua Kennon!! I wasn't trying to be rude with my response, sorry if it came off that way.

Nestle is certainly a great company, however I think it is a bit overpriced at the moment. I am a bit afraid to be honest to diversify into other shares in foreign currency (I am from a Eurozone island). Another Swiss company that I really like is Lindt Chocolate, however it is overpriced as well unfortunately (I am referring to the non-participatory shares, as the voting shares are too expensive for a normal individual to purchase). Thanks, Karl

I've watched Chocoladefabriken Lindt & Sprungli AG shares for years, waiting to buy some. If I remember correctly, they're never quite as expensive as they look as they have some super conservative accounting policies (at least the last time I examined them; it's been awhile, though, so that may no longer be true) that skewed the profits to appear lower than they actually were, but they still were never the top thing on my buy list given the other opportunities on my desk. The last time I wrote about it on the blog was back in 2011.

I'd love to get my hands on it. If I could get a price that had a high probability of good returns, I'd do it in a heartbeat because it's one of those businesses that is probably going to be around for a long time and provides a lot of emotional satisfaction, too. It's a happy thing to see people buying expensive Lindt chocolate during Christmas, Easter, or Valentine's day, giving it to the people they love. It's not a business like, I don't know, foreclosure inspections. There's nothing wrong with the latter, but all else equal, I'd rather make $1 from a happy person who can't wait to come back and spend more money in the future.

If I'm ever in Switzerland, going on the factory tour is on my to-do list. Look at it; it's glorious. Who wouldn't want to make money from this?

I just looked at Lindt's financials, and it looks like they have about a 7.5% earnings yield (275 million / 4.5 billion market cap). That doesn't seem expensive at all, in fact it seems rather cheap relative to US markets.

Sorry, I meant $338 milion / $4.5 billion market cap. The $275 million number is the 5 year average income.

Lindt's market cap is over $10 billion. You have to add the two classes of shares together. The $4.5 billion is only the value of the participation shares (the smaller shares LDSVF valued at $4900/share.) The larger, registered shares, go for 10x as much, and their total value is over $6 billion. I don't believe you can get the larger registered shares in the US markets, although Joshua may be able to clarify.

So, there's a way to own Lindt & Sprungli Registered Shares, indirectly. The Swiss Helvetia Fund (SWZ) owns a basket of about 30 Swiss equities. Their 4th largest holding happens to be Lindt & Sprungli AG - 344 Registered Shares of Lindt at a cost of 10 milion and a market value of 18 million. Lindt was also one of their positions they added to in 2013. SWZ's dividend doesn't look like much, but at year end they often pay a "long term gain distribution" which last year worked out to about 9% of the share price. Thought I'd mention it so you can look if you want. I've owned SWZ for something like 3 years now.

Eric is exactly right. Most finance portals lead to bad figures from time to time because they rely on automated scripts rather than human entry so you get these bizarre errors. In the case of a company like Lindt, with two share classes, it grabs one of the share classes, multiplies it by the share price, and then comes up with a market capitalization value that is practically meaningless.

It happens all the time, even here in the United States with domestic stocks. Look at Berkshire Hathaway. As of the last 10-K, it had 857,911 Class A shares and 1,179,141,327 Class B shares.

The Class A shares are trading at $192,103, giving the class as a whole a market value of $164,807,276,833.

There are 1,179,141,327 Class B shares, which are trading at $128.02, giving the class as a whole a market value of $150,953,672,683.

Together, the two classes give Berkshire Hathaway a total market value of $315,760,949,516. That's the real market cap.

Yet, until fairly recently, if you pulled up the Class A share price, you would have only seen the Class A market capitalization. They still haven't fixed the Class B market capitalization, which shows $210,500,000, which is laughably inaccurate.

The same thing happens on dividend and earnings calculations frequently, too. A couple of weeks ago, there was a day when nearly every dividend calculation was off on Yahoo Finance and seemingly no one noticed. I never saw it mentioned anywhere, yet if you took the dividend rate, and divided it into the share price, it was consistently 10%-30% lower than the sticker dividend yield showed on the stock quote page.

And that's just the start. Most portals go off trailing twelve month dividends, not declared forward dividends, so the dividend yield appears lower than it is in the case of a dividend hike, which is the norm at most successful firms. This happened to Coca-Cola a few months ago when the portals were calculating the dividend yield on a $1.12 dividend not the $1.22 that the investor would receive.

And then, since the earnings per share figure is pulled from the reported number without adjustments, sometimes you get an artificially high or lower p/e ratio, too. You don't have to look very far to find it, either. I won't ruin the surprise but it's happening with one of the Dow Jones Industrial Components at the moment. The actual valuation is much lower than it appears, making the shares a more attractive buy relative to the market for the long-term owner. It's never going to show up in a stock screen or financial portal quote but it's right there when you open the financial statements in the annual report.

The list is long. If something looks off, or a company looks interesting, there is no substitute for the source financial documents.

Thanks for the response. Now I know to dig deeper than Yahoo's numbers. So with the new Market Cap, the earnings yield looks to be a far less impressive 3%.

Lindt is a Special stock. it is really expensive but many People in switzerland are crazy about it (the chocolat too). i'm working in a bank and always around April the client's call and ask if there shares are registered with the Company so that they can go to the annual general meeting. agm visitors get a package of chocolat, it's called the "bhaltis" that's swiss german and means "Keep it". it wheighs around 4.5 Kilogramm. if i remember right they get also some Foods from Sprüngli ( a well know local confectionary). i guess it's one of the best Sweets Partys in switzerland.
unfortunatly i don't own any shares of lindt or the lindt participation unit but i always check their annual Report. even the Balance sheet is special in my eyes. there are not many companies around with no bank debt, no outstanding bonds or no cp Programm. some Investors prefer leverage in a balance sheet some don't.
i think as long as the Company is buying back it's shares, the results are good and they give away the chocolate package at the agm the shares will go higher.
but you still can buy shares of Nestlé ( i prefer cailler chocolate over Lindt chocolate) which is also a Special stock. there are many thousands listed companies around the world but just a few of them are really really Special and should never be sold even if they are boring or have one or two bad years.
btw great site!!

I have no idea! This is so cool! 18,000 shareholders and all that free chocolate! I'm reading about it now. Thank you for telling me!

I might have to attend someday. I want one of those!

in Lindt's annual report, they say they are "annihilating their shares, through the buyback program."

Also in the annual report, they give the average PE ratio over the last 5 years. From '09 to '13, the PE ratio has been 29.85, 28.37, 28.96, 31.99, and 35.92 respectively. So it sounds like an always expensive stock!

The conventional wisdom on sites like Seeking Alpha is that many of the popular dividend growth stocks are indeed overpriced (KO, MCD, PG, UL etc), and only a few might be fairly priced (GIS).
I take all those opinions with a grain of salt, instead looking at those discussions to get ideas for possible investments, rather than any particular entry point/value that a particular author believes is appropriate. I don't time the market, though increased yield on cost is certainly nice should there be a dip. I would certainly like to see Joshua's thoughts on waiting for dips/pull back when there are so few values out there (at least KO doesn't have a p/e of 50 like in the 90's), versus putting money into known performers irrespective of the market for a long term investor.
Presumably his next article on the subject should be able able to demonstrate which perspective is better, based on the dataset, as some in the past have demonstrated.

As Charlie Munger said, "the right way to make decisions in life is based on your opportunity cost." If you're waiting for dips pull backs, it means you're holding cash, which is losing value against inflation. Holding Coke shares, even if overpriced, is still better than cash. You have to think about if option A is better than option B and better than option C.

My question is how much cash should one hold in liquid reserves? I abhor having cash sitting there doing nothing, but I know the prudent answer is to maintain a sufficient amount to be able to capitalize on any substantial dip in the market. What is considered a "sufficient amount of cash" and also what is considered a "substantial dip" are probably both up for individual interruption. I would be curious to hear what size of cash reserve (as a percentage of their investments) people on this site find justifiable.

I'll go but I have no dependents, no debt, a small net worth (but above the US average for both age and salary) and live a mild lifestyle.
1. Cash or checking account is usually just a bi-weekly paycheck's worth or two.
2. Cash equivalents like CDs, Money Market or Treasury bonds are 2 months' salary to 6 months'.
3. It's been a while since I've had a real emergency requiring me to convert cash equivalents. Larger purchases I just save a little longer.
4. A substantial dip would be a 20% DOW drop over the course of days up to a few months. It doesn't keep me up at night worrying nor saving to buy on the dip. DRIPs and dollar cost averaging will handle that just like the last one. I was in grade school for the '87 Black Monday crash, college for the tech bubble burst and recent graduate for 9/11.

Most of my dividends (~2% of my yearly return) come at the end of June, which is soon enough. Yay!

Nestlé has an Investor Seminar yesterday and today in Boston about their business in America. slides & Webcast can be viewed on their Homepage. (i guess they made around $28b turnover in the US alone. GIS had around $18, Kraft around $18 too, KO around $48 Billion worldwide sales.)

Hi Joshua. I have a question related to Nestle and most other large consumer goods companies. Already for several quarters, companies like Unilever, KO and Nestle have been blaming unfavorable currency translations (in developing countries) for their lower than expected growth. I understand that an unfavorable change in the USD/Brazilian Real can have a negative impact on KO's results in Brazil but I don't think you can analyze that without looking at inflation rates too (inflation in Brazil is around 6%, and this has a positive impact on KO's results because they are able to increase prices at (at least) the same rate as inflation). What's your opinion on this subject? What do you think was the real impact of the last quarter's currency fluctuations on the results of these large corporations? Thanks!

If we are restricting the conversation to these gargantuan multi-nationals, I think in the long-run, they are fairly meaningless as they tend to offset each other despite significant volatility. If we were facing some sort of Weimar Republic devaluation in a major global economy, that would be one thing but that's not what is happening. The only true, meaningful hit to intrinsic value a lot of these firms faced was the nightmare in Venezuela, which if you have spent any time buried in 10Ks the past few years, you've seen everywhere. Even then, it's small when viewed over decades.

Generally speaking, for the true long-term owner, as long as people in developing countries are buying more toothpaste, frozen pizzas, Coca-Cola, and laundry soap, someway, somehow, that purchasing power will eventually make its way back to owners. In that sense, management's success should be viewed in constant currency adjustments. That's certainly how I'd look at the year-over-year results for any given specific geographic area; e.g., if unit volume is up 10% while sales were down 5% due to currency fluctuations, who cares? That's life. That's my philosophy, anyway. I don't lose any sleep over it.

Joshua,

Is this article at all accurate with regards to our NSRGY dividends (if we own the ADR in a regular taxable brokerage account)?

I was under the impression we would be made whole by the foreign tax credit at tax time, am I missing something in my understanding?

Your impression is correct for most Americans under most circumstances assuming they hold their Swiss stocks in a taxable brokerage account and not a retirement account.

For a summary overview, here is an article that explains the basics.

For the grown up version, here is a PDF file of the IRS explanation for how the tax credits work. It contains hypothetical examples so you can see how the math works yourself.

You'd need to talk to your own tax professional but, long story short, under most circumstances, most American investors are probably going to be roughly in the same boat as they would have been had they bought an American dividend paying stock. It just looks different on paper. In the case of NSRGY, you pay the Swiss government at the time the dividend is distributed but then you end up paying the American government less on April 15th because you get to effectively credit the taxes you've already paid. You're still only giving up 15% or whatever it is depending on your circumstances, you just have to account for it differently than you would, say, on an AT&T dividend.

Hi Joshua, not sure what happened to the link....I'll try again:
##http://www.investmentnews.com/article/20140427/FREE/304279997/foreign-dividends-can-be-a-minefield##