Company Description: Kellogg Company is a leading 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 premium to all four valuations above. Since K's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 103.1% premium to its calculated fair value of $33.09. 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 one Star in this section for 1.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The company has paid a cash dividend to shareholders every year since 1923 and has increased its dividend payments for 13 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 $279 is below the $2,200 target I look for in a stock that has increased dividends as long as K has. The stock's current yield of 3.09% exceeds the 2.65% estimated 20-year average MMA rate.
Peers: The company’s peer group includes: Campbell Soup Company (CPB) with a 2.7% yield, General Mills, Inc. (GIS) with a 3.6% yield, and The Hershey Company (HSY) with a 2.3% yield.
Conclusion: K did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks K as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $33.62 before K's NPV MMA Differential increased to the $2,200 minimum that I look for in a stock with 13 years of consecutive dividend increases. At that price the stock would yield 6.2%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,200 NPV MMA Differential, the calculated rate is 9.9%. This dividend growth rate is higher than the 2.0% 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.
Historically, K enjoyed relatively stable end markets. Its marketing efforts and product innovation have bolstered sales and reduced risk. However, the company has laid off hundreds of employees after coming under fire in November 2016 when it said "Breitbart News’s conservative readers are not aligned with our values as a company." Breitbart initiated a #DumpKelloggs campaign in which many of their readers, and other conservatives chose to boycott the company.
At 55%, K's free cash flow payout is down from the 61% in my previous report, and is now slightly below my maximum of 60%. Its debt to total capital at 80% (flat with the previous report) is well in excess of my 45% maximum. The stock is trading significantly above my calculated fair value of $33.09, 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 Portfolio holdings here.
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Tags: K, GIS, CPB, HSY,
