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Kellogg Company (K) is a large consumer staples company that has struggled with consistent growth until recently. Revenue in 2020, which was a good year for consumer staples companies was lower than in 2013. That being said, Kellogg has decent margins and is consistently profitable and is growing again. Kellogg stock has also been paying a dividend since 1925 and should become one of the few stocks that have paid a dividend for 100+ consecutive years. Additionally, Kellogg is a dividend growth stock with 18 straight years of dividend increases making the company a Dividend Contender. Kellogg has products most people buy, and it is one of the market leaders in cereals and snacks. At the right valuation, Kellogg may be a good fit for those seeking either dividend growth or income.
Overview of Kellogg
Kellogg was founded in 1906. The company’s main product categories are cereals, frozen foods, noodles & other, and snacks. Kellogg has strength for breakfast. Major brands include Kellogg’s, Eggo, Cheez-It, Pringles, Kashi, Morningstar, Gardenburger, Nutri-Grain, Special K, Coco Pops, Rice Krispies, Raisin Bran, Frosted Flakes, Cocoa Krispies, Corn Flakes, Corn Pops, Apple Jacks, Froot Loops, Krave, Mueslix, Frosted Mini-Wheats, Honey Smacks, and others. The company operated globally in over 180 countries though four segments: North America, Europe, Latin America, and Asia Middle East Africa or ‘AMEA’. Kellogg sells its products through retailers, wholesale distributors, brokers, and e-commerce. Total revenue was $13,770 million in 2020 and $13,942 million in the LTM.
Kellogg Revenue and Earnings Growth
Kellogg’s revenue peaked in 2013 and declined until 2017. After 2017, revenue grew again. Some of the decline was due to general challenges that ready-to-eat and packaged food companies faced during that time. Consumers were trending toward more natural and organic foods where Kellogg was not as strong. Gross margins have generally trended down in the past decade as input costs have risen. On the other hand, operating margins and net profit margins have slowly trended up as Kellogg became more efficient.
Kellogg has periodically conducted acquisitions adding to the company’s portfolio of brands and to revenue. Kellogg has added major and smaller brands including Keebler Company in 2001, Morningstar Farms, Kashi, Gardenburger, Pringles, and Rxbar in 2017. The company has also acquired brands internationally. Kellogg has also sold brands as the company reshaped its portfolio. Most recently the company divested Famous Amos, Murray’s, Keebler, Mother’s and Little Brownie Bakers in 2019 for $1.4 billion.
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Today, the company is focused on organic growth as well, and now has a chief growth officer and is trying to leverage data analytics to drive market share growth. Kellogg is also expanding in the e-commerce channel. Kellogg is also focused on product innovation and extensions through brand building. The company has revamped its innovation approach and has several interconnected centers and labs focused on food innovation. The major purpose is for brand extensions and trying to create the next big idea. For instance, in 2019, Kellogg introduced the Wavy Pringles and Rice Pringles, and in 2021 Scorchin Pringles will come out. These are all extensions of the Pringles brand.
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Kellogg Dividend Growth and Safety
Kellogg stock dividend has grown at nearly 2.9% annually over the past 5-years and 3.9% annually over the past decade. Dividend growth has been slowing due to lower revenue and a rising payout ratio. Kellogg’s forward payout ratio is now approximately 57% as adjusted diluted earnings for 2021 is expected to good after a solid 2020 that benefitted from the COVID-19 pandemic.
Kellogg’s dividend growth rate will likely remain at low-to-mid single-digit for the near future. Kellogg is a mature consumer staples company and growth is hard to come by. That being said, bolt on acquisitions, brand extensions, and margin expansion should allow revenue, earnings, and free cash to support a rising dividend.
From the perspective of earnings, free cash flow, and debt Kellogg’s dividend safety is not great at the moment due to the effects of COVID-19. The current forward dividend is $2.32 per share giving a yield of about 3.45%. The payout ratio is about 57% based on consensus earnings of $4.10 per share in 2021. This is a good value and below my threshold of 65%. At the relatively slow earnings growth rate and dividend growth rate, I expect the payout ratio to be roughly around 55% – 65% for the foreseeable future.
The dividend is also reasonably safe on a cash flow basis. Operating cash flow in the TTM was $1,830 million. Capital expenditures were $566 million giving free cash flow of $1,264 million. The dividend required $782 million giving a dividend-to-FCF ratio of roughly 62%. This is an acceptable value and below my criterion of 70%. Again, I expect the dividend-to-FCF ratio to be roughly in the 60% to 70% range.
Kellogg Balance Sheet
The balance sheet can be more conservative but net debt and the leverage ratio has been trending down. At end of Q1 2021, Kellogg had $391 million in cash and cash equivalents and $7 million in trading asset securities on hand offsetting $428 million in short-term debt and $612 million in current long-term debt and $6,670 million in long-term debt. Interest coverage was about 9.5X at end of the quarter. The leverage ratio was approximately 2.8X. For perspective, at end of 2017 the leverage ratio was 3.7X. I would like to see a higher interest coverage and a lower leverage ratio. However, the dividend is not currently at risk from debt.
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Kellogg’s Valuation
Kellogg is currently fairly valued based on earnings multiple. In the past 5-years the average price-to-earnings ratio was nearly 16.7X. The stock is currently trading at a P/E ratio of about 16.6X based on consensus 2021 earnings. If we assume a fair value multiple of 16.7X this gives a fair value estimate of ~$68.47 and the stock is trading at price of $67.15.
A second valuation model, the Gordon Growth Model, gives a fair value estimate of $58 assuming a desired return of 8% and dividend growth rate of 4%. If revenue and earnings growth continue though, future dividend increases may be larger than expected making this estimate low.
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Final Thoughts on Kellogg
Kellogg is a stock many investors like to hold because of its yield, long dividend history, and dividend growth. The current dividend yield is about 3.45% and the dividend is growing albeit at a slow and steady rate. The yield is more than double that of the average for the S&P 500 making Kellogg attractive from the perspective of income. Dividend safety is also decent, but debt is higher than probably desired. Kellogg is fairly valued now since after reporting good Q1 2020 results the stock price jumped. However, I would consider Kellogg at the right price despite the slow dividend growth. Small investors may want to keep this stock on their watchlist.
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Author bio: Dividend Power is a self-taught investor and blogger on dividend growth stocks and financial independence. Some of his writings can be found on Seeking Alpha, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial blogs. He also works as a part-time freelance equity analyst with a leading newsletter on dividend stocks. He was recently in the top 4% out of over 8,021 financial bloggers as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.
Disclaimer: Dividend Power is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
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“a fair value estimate of ~$68.47”
Interesting analysis – by the way, how did you estimate this valuation?
I used 16.7X fear value multiple times consensus 2021 earnings