Company Description: Kellogg Company is a producer of ready-to-eat cereal also sells snack and convenience foods such as cookies, crackers, potato chips, cereal bars, fruit snacks and frozen waffles.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
K is trading at a discount to only 3.) above. Since K's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 130.9% premium to its calculated fair value of $28.13. K did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
K earned no Stars in this section. The company has paid a cash dividend to shareholders every year since 1923 and has increased its dividend payments for 10 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $37 is below the $2,500 target I look for in a stock that has increased dividends as long as K has. If K grows its dividend at 2.2% per year, it will take 8 years to equal a MMA yielding an estimated 20-year average rate of 3.31%.
Memberships and Peers: K is a member of the S&P 500. The company’s peer group includes: Campbell Soup Company (CPB) with a 2.7% yield, General Mills, Inc. (GIS) with a 3.0% yield, and The Hershey Company (HSY) with a 1.9% yield.
Conclusion: K did not earn any Stars in the Fair Value section, did not earn any Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of zero Star. This quantitatively ranks K as a 0-Star Avoid stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $24.68 before K's NPV MMA Differential increased to the $2,500 minimum that I look for in a stock with 10 years of consecutive dividend increases. At that price the stock would yield 7.5%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,600 NPV MMA Differential, the calculated rate is 11.6%. This dividend growth rate is higher than the 2.2% used in this analysis, thus providing no margin of safety. K has a risk rating of 2.25 which classifies it as a Medium risk stock.
K enjoys relatively stable end markets. Its marketing efforts and product innovation should bolster sales and reduce the risk of consumers trading down to less expensive products. In November 2013, the company announced a global four-year efficiency and effectiveness program. K projects the program will result in pretax charges of between $1.2 billion and $1.4 billion, with cash savings reaching between $425 million and $475 million in 2018.
The company’s U.S. cereal business accounts for 40–45% of sales. It has been performing poorly since 2012 due to sluggish growth and lower demand due to competitive pressures from yogurt, eggs, bread and peanut butter. K has tried to reinvigorate this segment with innovation and aggressive marketing with little results to show from these activities.
At 60%, K's free cash flow payout is at my 60% maximum (up from 58%). Its debt to total capital at 69% (down from 72%) is still well in excess of my 45% maximum. The stock is trading significantly above my calculated fair value of $28.13, so for now, I will wait on a more opportune time to initiate a position in K.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in K (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: [K] [GIS] [CPB] [HSY]
