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The Kellogg Company (K) is a 106 year old American Institution headquartered in Battle Creek, Michigan. Perhaps they are best known for manufacturing and marketing ready to eat cereal and convenience food products in North America, Europe, Latin America and the Asia Pacific region. Iconic brands include Frosted Flakes, Special K, Rice Krispies, Corn Flakes and Frosted Mini-Wheats to name just a few. In addition to cereal, the portfolio also includes Eggo Waffles, Pop-Tarts, Cheez-It and Townhouse Crackers, Keebler and Mothers Cookies. New for 2012, Kellogg's added Pringles which the company purchased from Procter & Gamble earlier this year.

3rd Quarter Results announced November 1, 2012

Kellogg reported net sales of $3.7 billion, an increase of 12.3 percent from the third quarter of 2011. Net earnings were $296 million, or $0.82 per diluted share, an increase of 2.5 percent from the $0.80 per diluted share reported in the third quarter of 2011. This quarter's reported earnings per share included approximately $0.04 of integration costs related to the acquisition of Pringles. The cost of the Frosted Mini-Wheats recall announced last month was approximately $0.06 per share, which was offset by better-than-expected performance from the Pringles business and certain below-the-line items. For those of you who may have missed the announcement, Kellogg recalled the cereal because of the possible presence of a flexible metal mesh from a faulty manufacturing part.

Full-Year 2012 Guidance

The company reaffirmed its guidance for full-year internal net sales growth of between two and three percent. Due to the cost of last month's recall, the company now expects that full-year internal operating profit will decline between four and six percent. The company also reaffirmed its guidance for as-reported earnings per share to be in a range between $3.18 and $3.30 per share, including the cost of the recall and the anticipated impact of the Pringles acquisition.

Pringles Purchase:

Given the 3rd Quarter results, it appears that the $2.7 billion dollar purchase of Pringles earlier this year is already paying off. It turned out to be more accretive than company management thought it would be plus since Pringles gets two-thirds of its revenue from overseas, Kellogg is also hoping the deal gives it inroads into the international markets where the ranks of people with more disposable income are growing. In an interview with the Associated Press, the company said International sales rose 15 percent to $1.3 billion. Not including Pringles, the figure rose just 1 percent. The company's European unit continued to struggle, with sales down 2.5 percent, but Kellogg noted that was an improvement from the previous quarter. Latin America saw core sales rise 4 percent, while the Asia Pacific region rose by 7 percent.

Juicy Dividend with Room to Grow

Kellogg dividends have been paid since 1923. For the last 7 years the company has consistently increased its annual dividend. The company has a 5-year average dividend growth rate of 7.9%. Currently the dividend payout ratio is at a reasonable 52%, leaving room for product development, acquisitions and dividend growth.

Competition:

General Mills, Inc (GIS) is a larger market cap competitor which generates close to $3 billion more in sales revenue per year. They have a different product mix and brand portfolio which includes Ice Cream and frozen snacks (Haagen-Dazs), as well as baking products (Betty Crocker, Pillsbury and Gold Medal), Yoplait Yogurt and the Macaroni Grill Restaurant Chain. General Mills competes directly with Kellogg's in ready to eat cereal. The General Mills line includes well known names such as Cheerios, Wheaties, Chex, Kix, Lucky Charms and Total to name a few.

Nestles (NSRGY.PK) and Ralcorp (RAH) both offer products that compete in this space but are not considered direct competitors.

Kellogg

General Mills

Market Cap

$19.21B

$25.6B

Trailing P/E ratio

16.3

15.5

Return on Equity

51.1

22.0

Employee head count

30,700

35,000

Annual dividend

$1.76

$1.32

Dividend Yield

3.40%

3.30%

52 week price change

+7.1%

+3.9%

Source: Yahoo Finance

Conclusions:

Both Kellogg and General Mills are solid companies. I like the dividend, yield, reasonable P/E ratios and superior return on equity of both these companies. With the Pringles acquisition, Kellogg is becoming better diversified than they once were. Plus with Pringles, Kellogg has a chance to compete for afternoon and evening consumer attention as they move into the salty snack space. Kellogg should also benefit by leveraging the superior international presence Pringles had already developed across the rest of their product line. As a retiree focused on dividend income I find both of these companies appropriate for consideration.

Source: Pringles Fattens Up Kellogg's 3rd Quarter Revenue