Nestle's very problematic weight

With a market cap about to overtake the €300bn mark, Nestle has become an issue for European equity markets. Nestle trades at 25.5x, presumably still an acceptable P/E. The issue is the €300bn and the €100bn gained ytd.

Oops! Nestle

Nestle’s market cap amounts to about 4% of the Stoxx600 free float market cap or about 3% of the AlphaValue coverage market cap. It accounts for a third of the European Food & Beverage sector, about to become the largest by market cap thanks to … Nestle.

Nestle weighs as much or more than the total market cap of 19 sectors out of the 30 followed by AlphaValue.

Nestle will generate exactly one quarter of the 2019 Food & Beverages' FCF before dividend  (€44bn) and 28% of its dividend paying capability. Nestle will account for c. 2% of the European dividends or 3.5% of dividends ex Financials and Deep Cyclicals.

Not to be entirely forgotten, Nestle is Swiss. It is weighing “only” 20% of the SMI index as this index is capping individual weight at 20%. On the AlphaValue Swiss coverage of 35 names, Nestlé weighs more than a quarter.

Nestle's mega weight is presumably a self-feeding mechanism since ETFs have made the life of many investors a simpler proposition. Whether an ETF is going for a Swiss exposure, a Food exposure, a world exposure, an ESG exposure, a “quality” stock exposure, a quality growth dividend exposure, you name it, it will be stuffed with Nestle shares. Such an ETF will outperform any actively-managed fund unlikely to dedicate more than 10% of its assets to Nestle.

When the boat tips over

Nestle certainly ticks all possible boxes when it comes to meeting investment principles which are increasingly risk averse, even before more negative rates led to weird investment strategies. The obvious consequence is that avoided risk lurks back in the shape of a massively crowded trade with unaware retail investors at the end of the chain. Whether those ETFs rely on actual Nestlé shares or on some synthetic concoction will determine how much of a negative leverage a Nestle correction would have across equity markets.

The c.€100bn gained by Nestle over the last eight months are akin to a systemic risk for European equities. No offence to Nestlé.