Procter & Gamble's Gain is Kellogg's Gain
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Kellogg (NYSE: K) established its brand by selling Kellogg's Corn Flakes and other cereals. The company's cereal brands helped it create some snack food brands, as Kellogg used its Special K cereal brand to develop Special K crackers, which PR Week mentions. Kellogg's can obviously develop a snack food on its own, but sometimes the best deal comes from another company. When Procter & Gamble (NYSE: PG) sold Pringles to Kellogg, the two companies reached a deal that helped out both parties.
Going after the international snack food market seems like a good decision for Kellogg. Kellogg's managers know that many American grocery store shoppers already buy Kellogg's cereals, and a shopper who eats one bowl of cereal in the morning would need a lot of convincing to eat two. Kellogg might be able to sell more cereal by cutting its prices to compete with generic cereal brands, and these sales could reduce the cereal maker's total income by lowering its margins. International shoppers offer an alternative growth opportunity that doesn't require deep discounts, and the acquisition expands Kellogg's snack product line.
Kellogg's expertise in the food industry should help it manage the Pringles operation effectively, and the acquisition opens up new markets. It doesn't seem like Kellogg overpaid for Pringles either, as Reuters reports that Procter & Gamble could have earned more by selling Pringles to Black Diamond last year because of the tax consequences of the sale.
Procter & Gamble also benefits from rising international sales, and it sold off a strong brand, although it did get $2.7 billion in the exchange. Procter & Gamble currently has $4.4 billion in cash and $33.3 billion in debt, so the sale boosts its cash reserves. The extra cash will help Procter & Gamble maintain its reputation as a good choice for dividend investors. The company's dividend has increased consistently in recent years, rising from $1.28 a share in 2007 to $1.97 a share in 2011. The cash from the Pringles sale should help Procter & Gamble continue to pay out higher dividends in 2012 and future years.
Even without Pringles, Procter & Gamble still plans to pursue an international growth strategy. The company sells many personal care products, such as Pampers diapers and Gillette razors, which it markets to shoppers in India, China, Brazil, and other nations. Procter & Gamble doesn't need to sell food to report higher earnings in other countries, and with the Pringles sale it no longer makes any food for human shoppers. Procter & Gamble still makes Iams pet food, and this brand is a likely sale in the near future.
Kellogg reported 22.8 percent earnings growth for the quarter while Procter & Gamble reported a 49.3 percent drop, although quarterly earnings figures might not give the full picture here. Both companies expect earnings growth over the next year, which their international sales should help provide. Kellogg's forward price to earnings ratio, at 14.05 according to Yahoo Finance, is a bit lower than Procter & Gamble's 15.51 ratio, so Kellogg may be a slightly better deal.
Both Kellogg and Procter & Gamble seem better positioned for future growth now. Kellogg now offers a wider array of snack foods, and added a well known snack brand to its lineup. Procter & Gamble has additional cash to pay dividends and promote its personal care products, and it still owns many strong brands which international shoppers are adopting. I recommend both stocks.
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