2nd UPDATE: Nestle Upgrades Dividend, Sets Buyback; Outlook Vague

Signalling confidence, Switzerland's Nestle S.A. (NESN.VX) Friday raised its dividend and detailed a new share buyback program as sales growth improved towards the end of 2009, even though profits fell sharply because the previous year's result had been inflated by proceeds from asset sales.

However, the world's largest food and beverages producer declined to give a specific growth outlook for this year, instead reiterating its long-term target for a sales growth rate of between 5% and 6% excluding foreign exchange fluctuations and changes in its portfolio.

It said it would counter an expected 2% to 3% rise in commodity costs this year by raising prices, improving efficiency and changing some products.

Analysts had expected the company to give a more detailed outlook for this year, which is expected to be characterized by the input cost rises and a continued difficult consumer environment.

However, Bernstein Research analyst Andrew Wood said the company's prudent stance for 2010 provides Nestle with the opportunity over-deliver on its forecasts. Wood expects organic growth to stand at 5.3%.

Nestle, which earlier this year bought Kraft Foods Inc's (KFT) frozen pizza business, a consequence of the U.S. rival's pursuit of Cadbury, said net profit fell to 10.42 billion Swiss francs ($9.56 billion) in 2009, compared with CHF18.04 billion in 2008. The previous year's figure was inflated by CHF9.2 billion in proceeds from the sale of the first tranche of U.S. eye care-company Alcon Inc. (ACL) to Novartis AG (NVS).

Sales declined 2.1% to CHF107.62 billion from CHF109.91 billion.

However, the figures beat analysts' expectations and the company said it plans to raise its 2009 dividend to CHF1.60, from CHF1.40.

Nestle also said it would complete its current CHF25 billion share buyback in the course of this year, and would then start a new CHF10 billion buyback program. It expects to have completed half of the new program this year.

Analysts had speculated about Nestle's plans for its large cash pile following its announcement in January that it will sell the remainder of Alcon to Novartis.

"Maybe with this strong result, the market can start to focus on what a solid business Nestle is rather than on buybacks," said Kepler analyst Jon Cox, who has a buy rating and a CHF56 price target on the stock.

On the Swiss bourse at 1110 GMT, Nestle shares were up 2.6%, or CHF1.35, at CHF52.80 in an overall slightly higher general market.

Nestle didn't give any quarterly figures.

Bernstein's Wood, who has an outperform rating and a CHF60 price target on the stock, said a strong performance in the second half of 2009 bodes well for 2010.

Nestle's organic growth, which measures changes in selling prices and volumes but excludes the impact of currency moves, was 4.1% for the whole of 2009, an improvement on third quarter growth of 3.8% and 3.5% during the first half of the year.

Nestle said it wants to increase organic growth in its food and beverages business this year, but didn't provide a specific target. It also reiterated its usual guidance for an improved operating profit margin in constant currencies.

-By Martin Gelnar, Dow Jones Newswires, [phone]; [e-mail]