Kraft (KRFT), best-known for its Macaroni & Cheese, Cool Whip, Planters peanuts, and Oscar Mayer brand, has struggled to grow the top line since spinning off Mondelez (MDLZ). Its third-quarter results showed further revenue weakness. Though management went to great lengths to explain how most of the organic net revenue decline was a result of the spin-off, the fact remains that organic net revenue growth was still poor (practically nil) after excluding the Mondelez impact. Earnings-per-share was lower than that of the prior-year period, after excluding an $0.18 per share benefit from market-based impacts to post-employment benefit plans; free cash flow is $745 million year-to-date (5.5% of sales), including the negative impact of more than $600 million in pension plan contributions. We like Kraft's brands and its dividend yield is enticing, but we have a difficult time making the case for adding its stock to the portfolio of our Dividend Growth Newsletter on the basis of recent fundamental performance.
Kellogg's (K) third-quarter results were equally weak. Internal net sales, excluding the impact of foreign currency impacts, advanced just 0.5% from the same period last year, while underlying internal operating profit nudged higher by just 0.6%. Kellogg North America's internal net sales fell 1.3%, though the firm did see some expansion in its Latin American and European business. Free cash flow, however, has fallen modestly year-to-date, to $1.03 billion (9.1% of sales). The firm also said its full-year 2013 reported earnings will be toward the lower end of its previously-provided range of $3.75-$3.84 per share. The maker of Pringles, Frosted Flakes, and Pop Tarts knows it has to do something to jumpstart earnings expansion and rolled out 'Project K' during the period, a global four-year efficiency and effectiveness program. The pre-tax charges related to the program are staggering, $1.2-$1.4 billion, though it believes global workforce reductions as part of the plan will create annual cash savings of $425-$475 million by 2018 -- annual savings of this magnitude represent more than $4 billion in equity value (by our estimates), several times that of the initial cost. Still, top-line growth continues to be elusive, and the firm can only cut so much fat before it hits bone.
Kraft and Kellogg are both household names. We're huge fans of their brand portfolios, but both are struggling to grow the top line. Kellogg's 'Project K' speaks to a focus on efficiency, and we wouldn't be surprised if Kraft engages in a similar cost-cutting spree to bring life to earnings growth. Both Kraft and Kellogg are trading modestly above their respective fair value estimates, and we're not rushing to add either to our actively-managed portfolios. We point to Procter & Gamble (PG) and Johnson & Johnson (JNJ) as better dividend-growth ideas.
Additional disclosure: PG and JNJ are included in the portfolio of our Dividend Growth Newsletter.