It plans to buy back more shares and also, Nestle intends to raise its dividends to its shareholders. Nestle said it plans to raise its dividend by 14.3% to 1.6 francs a share and announced it would buy back around 10 billion francs of shares this year.
What's the rationale of buying back shares which you once offered to the public ?
Well, by buying back more shares, you lower the supply of the stocks to the public. When you lower the supply, ceteris peribus (meaning the demand doesn't change), the price of the stocks will rise. It makes sense right?
Since there are a lower number of stocks left in the market now, people who want them will naturally pay a higher price for them now. Now, the demand becomes inelastic, which is to say that the total revenue will rise even if the price of the stocks is increased.
With the increase in stock prices, Nestle's shareholders benefit as well because their stocks are now worth more. They can sell them at a way higher price than before. On top of that, they are getting a high dividends because of the improving business. Such accrual growth of their returns is coveted by many in the market.
"Our 2009 performance was broad-based across all categories and regions and demonstrates our ability to deliver in the short term whilst continuing to invest for the long term," said Chief Eexecutive Paul Bulcke.
There you have it, a combination of soft and hard. To deliver in the short term and at the same time, planning for the future. That is a genius concoction to success.
Recently, Nestle has bought Digiorno Pizza from Kraft. A shrewd move which is said to have been a great purchase.
1. It is cheaper than expected.
2. It can leap a mile with that business that Kraft has given up. The Digiorno pizza is one of the core business of Kraft's but now, they have sacrificed it for the sake of acquiring Cadbury.
Either way, it does not affect Nestle because they weren't interested in Cadbury to begin with.
As it builds itself up, it buys back more stocks and then the prices start to fly up. When it's really high, they do not need to be afraid that the price level will be saturated because they can emulate Warren Buffett's move, which is to split the stock up.
Then, the whole cycle repeats itself.
Credits -marketwatch, -topnews, -investing-schools, -stockxpert
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