The U.S. food sector has been experiencing volatile commodity prices which are impacting margins and profitability. Companies operating in this industry are aggressively taking initiatives to overcome these volatile conditions, which are impacting input cost and resulting in increased pricing. Rising food costs have negatively impacted margins throughout the industry.
It is always difficult to pass on higher input cost to customers when food companies such as Kraft and General Mills have to compete with low-priced private label brands. However, at the end of the day, they have to pass on their input cost burden to consumers. In 2012, many packaged food companies implemented price increases in an effort to offset inflation pressures faced over the past two years.
In 2011, the chocolate maker, Hershey Company, was successfully able to raise prices. This increase uplifted excessive burden on margins and resulted in higher earnings and greater cash flows. Many companies in this industry are making acquisitions and capturing emerging markets in order to fuel growth. Last year, several major brands changed their ownership, including Kellogg's acquisition of Pringles and Campbell, and ConAgra's acquisition of Ralcorp, among others.
Innovation and diversity is also a key driver for future growth. Companies like Kellogg, Kraft, General Mills and Campbell's Soups are spending high amounts on research and development, advertising, and acquisitions to produce innovative products that can ease the way to capture a share in emerging and existing markets. On the whole, packaged food companies are expecting to see slow growth in developed markets; however, Emerging markets continue to offer a greater growth opportunity as middle classes expand across several regions.
In this article, I picked three star companies operating in this industry. These are Kraft Foods (KRFT), Kellogg Company (NYSE:K) and Nestle SA (OTCPK:NSRGY). These companies are making smart moves to enhance sustainable growth. Let's dig into each company to study their sustained growth and consistent returns.
How Kraft Is Set for Big Profits
This company has displayed strong growth for shareholders since its spinoff from its parent company. It offers a quarterly dividend of $0.50/share, yielding at 2.71%. Along with solid dividends, Kraft's share price is gone up by 19%. With a forward P/E of 16.4, the stock has potential to continue its upward momentum.
The company is making smart moves to generate increasing cash flow. Kraft continues to make significant progress on cost savings, cash flow, and market share, and the company builds its brands for the long-term growth. Its brand investments and top-line growth were held back by marketing, promotion and innovation plans.
It is operating under five business segments. All business segments are generating increasing profits for the company. Its solid brands, including Maxwell House, Jell-O, Crystal Light and Oscar Mayer are providing it a competitive benefit to develop as a key supplier for retailers. On top, its concentration on product innovations and new emerging markets are fueling growth for future.
Its strong management is also an aspect behind its profitability. In the recent quarter, Kraft managed to achieve 53.5% growth in its operating margin when revenue growth was negative at 1.1%, representing strong management. Therefore, Kraft is projecting $1.2 billion in free cash flows by the end this current year.
Its dividend looks safe as this company is generating increasing profits and massive free cash flows. Combined with strong brands, cost cutting measures and growth in emerging markets create a wide moat for this company. Overall, its solid business model and strong management should be able to sustain returns for shareholders.
How Kellogg Is Set for Big Profits
Kellogg is the world's top cereal company, a leading producer of savory snacks, the second largest producer of cookies and crackers and a leading North American frozen foods company. Kellogg has been offering strong dividends with steady price appreciation.
Recently, Kellogg has increased its quarterly dividend to $0.46/share, representing an increase of 4.5%. In the past five years, it has increased its dividend by 35.29%. Its payout ratio is mounting over the past five years, which is currently at 67% on earnings. On the other hand, its share price surged by nearly 47.305% over the past five years. At the time of writing, its stock is trading at around $60, which is well below its 52-week high. This downturn in stock price offers an attractive opportunity to take a position.
Kellogg was struggling to generate more sales with healthy margins due to volatility in commodity prices over the past two years. In order to cope with this situation, Kellogg's management set a new business plan. The management has suspended its buyback activities to strengthen its product portfolio, investing in growth opportunities and improving its balance sheet.
Its recent purchase of Pringles and Keebler set up Kellogg for fueling future growth. Both the Pringles and Keebler acquisitions led the path to achieve 12% growths in sales. Pringles businesses are making it as a dominant leader in the snacks markets. On the other hand, the company is aggressively looking to remove excessive debt from its balance sheet. Therefore, Pringles has refinanced its long-term debt of $9 billion at low rates. At the moment, its debt-to-equity ratio is high at 2.5%; however, its current ratio of 0.86 suggests no signs of insolvency.
Pringles' free cash flows are also showing positive signs. The company has a sufficient amount in free cash flows after paying dividends. In ttm, its free cash flows are at $1,167 million when dividends accounted for only $636 million. Its dividends look completely safe with the potential to generate massive free cash flows.
With the change in a business plan, recent smart acquisition and growth in emerging markets are creating footprints for sustainable growth. Kellogg is well set to achieve 8% growth in its top line. With this strong top- and bottom-line growth, it is well set to generate rising returns for investors.
How Nestle SA Is Set for Big Profits
Nestle SA manufactures and markets food products. Nestle products sold all over the world with strong brand recognition. Nestle is one of the most profitable companies operating in this industry.
The giant offers a dividend on a yearly basis that is currently at $1.8155/share. Soft consumer spending and persistent cost inflation created a competitive environment, but I have been impressed by Nestlé's ability to wade through current challenges. Nestle's business and product recognition is growing, which is reflecting in its share price performance.
With the sales growth of 5.3% and organic growth of 4.3%, the company is outperforming the market in Europe. Nestle is expecting strong progress in North America with a growth in key emerging markets. Its global presence, unrivalled category diversity and proven ability to bring innovative products generates continued momentum in both top- and bottom-line performance.
Nestle's diverse product portfolio that spans grocery stores and renewed emphasis on driving cost savings will continue generating solid cash flows and returns for shareholders over the longer term. With a debt-to-equity ratio of 0.2, which is very low, Nestle is generating strong free cash flows that are double than its dividend payments.
This industry has a lot of potential. Companies operating in this industry are improving their financials with the rising economy. Companies operating in this industry are making smart moves to capture emerging markets with cost-saving initiatives to boost profits. Kraft, Kellogg and Nestle are on track to generate substantial profits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.