Fast Growing Snack Giant With Long-Term Incentive

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Charlie Munger, one of the wisest investors in the world, mentioned that he considered incentives to be an extremely powerful tool in both life and business. Incentives are also a double edged sword as they can lead to a lot of incentive-caused bias and abuses. Mondelez International (NASDAQ: MDLZ) just announced the $10 million incentive package for the Chairwoman and CEO, Irene Rosenfeld. In the previous article, I have written about Rosenfeld’s past achievements and her recent missteps with Mondelez. I personally believe that the company should enjoy sustainable growth under her leadership. How about the recent $10 million package? Is it a decent incentive for the CEO to focus on the long-term business results? 

Two-part Incentives

The company mentioned that the reward was for “delivering top-tier performance during her tenure as CEO, for her ability to have envisioned and executed numerous transformational activities – including the recent, highly successful spin-off of the Company’s North American grocery business; for her foresight of the benefits of these transformational initiatives to shareholders; and for positioning MDLZ to deliver sustainable top-tier shareholder returns into the future.”

The incentive scheme is divided into two parts: 20% is restricted stock and 80% is performance-contingent restricted stock units. Those were granted using Fair Market Value (of $25.935). Thus, the total number of shares awarded would be around 385,579 shares. Let’s dive into each incentive.

Restricted Stock (20%)

Irene Rosenfeld received actual stock of Mondelez, thus she could collect any dividend payment for her position from the company. However, the stocks are “restricted,” thus she couldn’t “monetize” them right away (i.e. sell them). Thus, the restricted stock can insure her reward no matter how the market price of the company moves, as long as she stays in the company for the requisite period. In this incentive scheme, the time for the awarded restricted stocks to vest 100% is 3 years. However, the restricted stocks do not tie to the company’s price performance in the market. In terms of economic matter, investors who invest in Mondelez shares just care about two factors: dividends and capital gains. Thus, if you buy Mondelez shares, you would expect that it would pay consistent and growing dividends, and the share price will increase. The restricted stock incentive does not directly tie to the market price increase measurement.

Restricted Stock Units (80%)

The performance-contingent restricted stock units were tied to the stock price performance. Each unit would have the right to receive one common share. That might drive her to focus on short-term market stock price. Nevertheless, the restricted stock units will not vest within three years, and the vested distribution will be in several tranches with the price appreciation target:

  • 25% after the stock price appreciates 20% from the Fair Market Value on the grant date.
  • 37.5% after the stock price appreciates 30% from the Fair Market Value on the grant date.
  • 37.5% after the stock price appreciates 40% from the Fair Market Value on the grant date.

(Source: Mondelez filing)

In addition, there are several more conditions: “If the stock price hurdles are not attained prior to the earlier of i) the six-year anniversary of the grant date or ii) one-year following Ms. Rosenfeld's retirement as an executive officer, Ms. Rosenfeld will forfeit the outstanding unvested units at that time. If the stock price hurdle for the third tranche is attained and those units vest, Ms. Rosenfeld is required to hold the resulting net shares for at least one year following her retirement as an executive officer.

Following the above criteria, Rosenfeld should be long-term focused in delivering quality business results, which could be translated into favorable market price. In order to receive 25% of the incentive, the market price should be at least 20% above the Fair Market Value. And in order to obtain the entire award, she must deliver market price appreciation of at least 40%. Investors might see this as a good sign as both restricted stocks and performance-contingent restricted stock units have a vesting period of at least three years. Thus, the incentive is quite contingent on the business long-term performance.

Current Cheap Price Means Higher Future Rewards

At the current price of $25.76 per share, Mondelez is priced at only 8x EV/EBITDA. Compared to its peers including Nestle (NASDAQOTH: NSRGY), Kellogg (NYSE: K) and Hershey (NYSE: HSY), Mondelez is poised for the fastest growth with its greatest exposure to emerging markets. Kellogg is valued at nearly 11.8x EV/EBITDA. Nestle is more expensive with 13x EV/EBITDA, similar the valuation of Hershey, with 13.07x EV multiples. Mondelez is not cheaper only in terms of EV multiples, but in terms of price to growth ratio. Mondelez is priced at 1.5x PEG, whereas Nestle is the most expensive with 3.4x PEG. Hershey and Kellogg were priced at 2.36x and 2.53x PEG respectively.

Foolish Bottom Line

The incentive is performance related and long-term oriented for Irene Rosenfeld, the right chief CEO for Mondelez. The company is definitely a buy for long-term investors because of its competent leader, its cheap valuation, and its global market leading positions in many fast growth emerging markets. 

 

 


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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