This Food Stock May Reward Dividend-Hungry Investors
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As Treasury yields remain low, and fears of a global economic slowdown continue to plague equity markets, an increasing number of investors are turning to dividend paying blue-chip stocks as a means of securing income. As I’ve mentioned elsewhere, I am particularly partial to food stocks, as they produce indispensable goods, tend to have a low beta, and perform well in times of distress. Looking around for an appetizing bargain, I noticed that Kellogg’s (NYSE: K) valuation is currently quite attractive compared to the market.
The world’s number one cereal producer markets a range of tasty breakfast choices, as well as a number of different snacks. The company’s manufacturing activities take place in 17 countries, and their products are sold in over 180 countries. Despite this global reach, the firm is still very dependent on the North American market, which still accounts for about 70% of EBIT. This is perhaps a mixed blessing, as it shields the company’s profits from negative Forex translation, but has also led to a slowing of organic revenue growth compared to competitors such as Unilever (NYSE: UN), which has seen very strong growth in emerging markets that now account for over half the group’s revenue.
Q2 2012 earnings met the analyst consensus of $0.84, but the company reaffirmed soft guidance for the remainder of the year. Growth in the US was decent, but international performance weighed on the company’s profits with Europe especially showing signs of weakness. For full-year EPS the company expects between $3.18 and $3.30, compared to $3.38 in 2011. Q3 earnings are due on Thursday with a mean estimate of $0.80. A decrease in European consumer spending will continue to weigh on the firm’s profits, as well as tough competition from other brand products. Procter & Gamble (NYSE: PG), the world’s largest consumer goods producer, recently sold their Pringles division to Kellogg’s. This has led to a more balanced business model for Kellogg’s, but P&G like Unilever continues to outperform in emerging markets with a more diverse product range and a number of scale advantages.
Valuation and Dividends
In terms of valuations, Kellogg’s appears to be trading at a bit of a discount to the industry. The P/E stands at 16.08x earnings, compared to Unilever’s 20x and P&G’s rather pricey 22.33x. The price to book is rather high, however, at 9.02. Kellogg’s has a fantastic return on equity of 63% and a solid operating margin of 15.2%. Additionally, the company offers a forward yield of 3.27%. Unilever and P&G have similar dividend yields. With a payout ratio of 52% there may still be some room to grow for Kellogg's. The company has raised dividends for the past eight years now, making them a Dividend Challenger. This dividend growth has outpaced the industry for the last five years at least. With a beta of only .46 the stock offers fairly low volatility.
In short, while Kellogg’s faces a number of issues in terms of sales weakness, it is currently valued at a discount compared to the industry. As a solid choice in this challenging economic environment, the food industry usually provides a relative safe-haven and reduced volatility. Moreover, having increased dividends for the last eight years, the stock should satisfy yield-hungry investors. Q3 earnings will shed light on how the company has been faring lately.
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