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* Organic growth slows in Q3 from strong Q2
* Plans to return 20 billion Swiss francs to shareholders
* Revamps waters business, creates strategy unit
By Silke Koltrowitz
ZURICH, Oct 17 (Reuters) - Food group Nestle plans to return up to 20 billion Swiss francs ($20.13 billion) to shareholders over the next three years and reorganise its struggling waters business after organic sales growth slowed in the third quarter.
Packaged food makers are branching out into new areas such as plant-based meat alternatives or products made from all natural ingredients to boost growth in an otherwise sluggish market.
Nestle has followed this trend with its vegan Awesome and Incredible burgers and has also, under CEO Mark Schneider, sold its U.S. confectionery and skin health businesses while polishing up big brands including Nescafe.
Its organic growth, which strips out currency swings and acquisitions, dipped to 3.7% in the third quarter from 3.9% in the second as prices for its products fell slightly, the maker of KitKat chocolate bars, Maggi noodles and vegan burgers said in a statement on Thursday.
The figure was in line with analyst forecasts in a poll compiled by the company given that the second quarter marked its fastest growth rate in three years.
Nestle's shares were indicated 0.6% higher, according to pre-market quotes by Julius Baer. They have risen by around a third this year, helping to ease pressure from activist investor Third Point.
Nestle confirmed its outlook for organic sales growth of around 3.5% and an operating margin of 17.5% or above for the full year, pointing to strong momentum in the United States and its petcare business. China reported flat growth as infant nutrition slowed and sales at its Yinlu brand fell.
It decided to distribute up to 20 billion francs to shareholders over the period 2020 to 2022, primarily in the form of share buybacks, but special dividends were also possible.
"Should any sizable acquisitions take place during this period, the amount of cash to be distributed to shareholders will be adjusted accordingly," Nestle said.
In a separate statement, Nestle announced it would no longer manage its waters business, which posted weak organic growth of 0.5% for the nine-month period, as a global business. It will instead integrate it into its three geographical zones. Nestle's bottled water brands include Perrier and San Pellegrino.
"This move, subject to employee consultation where required, will help utilise Nestle's strong local expertise, better respond to rapidly changing consumer preferences, accelerate profitable growth and create synergies," it said.
Maurizio Patarnello, head of the waters business, will leave the executive board at the end of this year.
Nestle appointed Sanjay Bahadur, head of acquisitions and business development, to lead a new group strategy and business development function that should help identify internal and external growth opportunities. He will join the executive board on Jan. 1.
Vontobel analyst Jean-Philippe Bertschy said the announcement of a new buyback programme was a sign of strong brand development and cost savings gaining traction. He did, however, cite the issues in waters and its Chinese Yinlu and Hsu Fu Chi businesses.
Elsewhere, consumer goods giant Unilever reported weaker-than-expected third quarter sales, blaming softer demand in India and a slowdown in China.
$1 = 0.9935 Swiss francs Reporting by Silke Koltrowitz; Editing by Michael Shields and Jacqueline Wong