Kellogg Is Set for Big Profits with Smart Moves
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Kellogg (NYSE: K) has struggled over the last couple of years due to inflating costs, supply chain difficulties, poor product innovation, and increasing competition. All of this has taken its toll in the form of 1-2% drops in sales for both 2009 and 2010. Fortunately, Kellogg's management has admitted their shortfalls and now has plans to correct the course of the company.
While Kellogg has taken a bit of time to reverse things, its solid brand portfolio and expansive global scale continues generating increasing sales and earnings. With $14.2 billion of sales in 2012, Kellogg is the world's leading cereal company, the second largest producer of cookies and crackers, a leading producer of savory snacks, and a leading North American frozen foods company.
Smart moves by management
Kellogg’s management has been using a smart investment strategy to strengthen overall business and financial aspects. The company has suspended its buyback program to strengthen its product portfolio and improve its balance sheet. This time last year, Kellogg had been looking to spend $2-$3 billion on itsbuyback program that would finish in 2014.
Kellogg used these funds to strengthen its product portfolio. It acquired the Pringles snack business worth of $2.7 billion, leading to top line growth of 12% over the past year. Additionally, the Pringles purchase is helping Kellogg to more fully capture the snacks market. Pringles is well established in both international and domestic markets and has shown strong growth in Russia, Latin America, North America, and other emerging markets.
Kellogg’s management seeks to use the remaining funds for debt reduction. At present, Kellogg has a high debt-to-equity ratio of 2.4% compared to the industry average of 0.8%. Kellogg’s management made a smart move by removing high-interest debt. At the end of the recent quarter, its balance sheet showed a heavy long-term debt of $9 billion that was refinanced at low rates. Nevertheless, its current ratio of slightly less than 1% suggests that it has sufficient funds to pay current liabilities.
Growth in international and emerging markets
With Keebler and Pringles acquisitions, Kellogg is seeking to move from breakfast and capture afternoon snacking. At the end of the first quarter, Kellogg’s international sales grew by 2.2%. This growth is led by new products and by leveraging Pringles’ worldwide relationships to benefit Kellogg products in new emerging markets. Additionally, Kellogg is looking to launch several new products, such as Corn Flakes Porridge.
It is also taking advantage of trends in meal preparation and consumption with new meatless dinner offerings and food products. Kellogg has a potential to capture the market in various international arenas. Its investment focus on India, Brazil, and South Africa is set to benefit from low per capita consumption.
Dividend, growth, and future prospects
Kellogg has paid regular quarterly dividends over the past 35 consecutive quarters and currently pays $0.44 per share. Recently, it announced an increase in its quarterly dividend by 4.5% to $0.46 per share. The company's payout ratio has increased over the past 10 years and currently stands at 67%.
I believe this ratio is manageable. The company has shown strong cash flows to back dividends. On the other hand, with a strong financial position, Kellogg’ stock has shown a strong surge over the year. Its share price went up by nearly 30% over the year. At its current price, the stock is trading at 24 times its earnings, which seems pricy to me.
Kellogg’s main industry peers are Kraft Foods (NASDAQ: KRFT) and General Mills (NYSE: GIS). Kraft Foods is a consumer packaged food and beverage company. Kraft has been gaining momentum and its year-to-date stock price is up by 20%. After a strong first quarter, its stock gained momentum and reached its 52-week high of $57/share.
Kraft operates in a competitive North American and Canadian food and beverage industry. Its cost saving initiatives, combined with product innovation, are fueling its continuing eye-catching growth. Analysts anticipate a decent growth rate of 6% per annum for the next five-years. To do this, it is executing its marketing playbook more largely across its portfolio. With a strong marketing strategy, Kraft expects to post solid top- and bottom-line performance for the full year. Its annual dividend of $2 per share also looks safe as the company is anticipating generating $1 billion in free cash flows.
General Mills is the manufacturer and marketer of branded consumer foods sold through retail stores. General Mills is one of the best in the consumer defensive sector. It offers solid quarterly dividends, which are increasing year over year. The company is generating strong returns for investors. In the past year alone, it returned $1.9 billion via dividends and share repurchase.
Recently, the company announced fiscal 2013 results with a solid 19% growth in earnings per share. Its sales grew by nearly 7% to $17.8 billion with a notable contribution of 6% from new business. All three of its business segments are generating strong profits year over year. Its 22% growth in cash flow symbolizes its ability to sustain returns. I believe that General Mills is a buy for the long haul with solid dividends and steady price appreciation.
Kellogg’s management has shown strength to turn things around. It is now heading towards increasing profitability. Particularly, its recent acquisitions and innovations are creating strong footprints for future growth. It is well set to achieve 8% growth in 2013 with earnings per share growth of 5- 7%. With this strong financial growth, Kellogg is well positioned to generate increasing returns for investors.
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