My equity bond (Nestle)

Nestle Malaysia

Latest after-tax ttm-EPS is $2.39 per share

Nestle's underlying earnings are so consistent.

And Nestle is growing its earnings at about 8% per year.

A company with a durable competitive advantage, over time, the stock market will price the company's equity bonds or shares at a level that reflects the value of its earnings relative to the yield on long-term risk free interest rate.

Capitalized at the risk free interest rate of 3.5%, Nestle's after-tax earning of $2.39 per share is worth approximately $68.30 per equity bond/share.  ($2.39/3.5% = $68.30).


Here is a difference worth noting. 

Nestle is worth $68.30 per share  and it is trading today at around $68.00.  Therefore, for the Graham-based value investors, who wants to buy only at $40 per share, Nestle is not "undervalued"

But for those who are willing to apply their reasoning or thinking cap, just take a look at this scenario.

1.  You are being offered a relatively risk-free initial after-tax rate of return of 3.5% today when you buy at $68.30 sen per share.

2.  This after-tax rate of return is expected to increase over the next 20 years at an annual rate of approximately 8% per year.

3.  Then ask this question:  Is this an attractive investment given the rate of risk and return on other investments?

4.  What other attractive investment give the rate of risk and return of this nature?




I bought a long time ago at $10.20 per share

Thus, Nestle is my equity bond or share that is currently giving an after-tax yield of 23.4% ($2.39 / $10.20 = 23.4%) that is relatively risk-free and which is expected to increase over the next 20 years at an annual rate of approximately 8%.