Valuation Comparison Of 4 Dividend Paying Food Manufacturers

Includes: CAG, GIS, K, MDLZ
by: The Value Investor

With many economist indicating that the U.S. economy has seen its own "lost" decade over the last 10 years, let's see how traditional defensive investments have fared.

Old investments sayings like "no matter how tough the economy gets, people have to eat" imply that food producers should fare reasonably well, even in a tough environment.

In the next article I will investigate how the likes of Conagra (NYSE:CAG), General Mills (NYSE:GIS), Kellogg (NYSE:K) and Kraft (KFT) have fared in terms of returns, growth, margin development and valuation.


Over the last four years, all four producers showed single digit organic revenue growth. The main outperformer was Kraft Foods, which saw its revenue rise 34% over the four-year period. This was largely attributable to its 2009 acquisition of British Cadbury's, which added roughly $10 billion in annual revenues. Without the $19.5 billion acquisition, revenue growth would be in the high single digits.

All producers saw healthy gains in profits, except Conagra, which saw a 12% decline in its net profit as the company struggles to maintain its margins.

Company 2011 Revenue 2008 Revenue Revenue Growth 2011 Net profit 2008 Net Net profit Net profit growth
Conagra $12.3bn $11.3bn +8.8% $817mn $930mn -12.1%
General Mills $14.9bn $13.6bn +9.5% $1.79bn $1.29bn +38.8%
Kellogg $13.2bn $12.8bn +3.1% $1.23bn $1.15bn +7.0%
Kraft Foods $54.3bn $40.5bn +34.1% $3.53bn $2.88bn +22.6%


Times have not been easy for major food producers. Intense competition, rising commodity prices and a slowdown in income growth for households creates a tough environment to operate in. The largest margin improvements were shown by General Mills, which managed to expand its operating margins by over 200bps during the time period as it focused on its "core" divisions.

Kellogg's margins remained stable while Kraft saw an increase in operating margins, as Cadbury has much higher operating margins compared to the rest of its business. Net margins are depressed on higher interest charges related to its acquisition.

Conagra has not been able to even stabilize its margins, which has been reflected in its poor share price performance.

Company Operating margin 2011 operating margin 2008 Net margin 2011 Net margin 2008
Conagra 9.8% 5.7% 7.1% 8.2%
General Mills 18.1% 16.2% 12.0% 9.5%
Kellogg 15.1% 15.6% 9.3% 9.0%
Kraft Foods 12.2% 8.9% 6.5% 7.1%


Irrespective of how quickly the company is growing or how high its margins may be, it all ends up with paying the right price for a long term investor. Conagra sells for mere 0.9 times its annual sales, however it does have the lowest operating margin at 9.8%

On the other end, General Mills is valued at 1.65 times its annual sales but has a 18.1% operating margin.

Reconciling both sales and margins is, of course, the price-earnings ratio. What is noticeable is the higher price earnings ratio for Kraft, which has seen a lot of acquisition-related growth (opposed to organic growth) and still gets a valuation of 18.9 times its annual earnings as investors are betting on more synergies from the 2009 Cadbury's deal. At the time when the deal was announced, Kraft promised $625 million in annual cost savings. Valued at 2 times its annual revenue and about 30 times its annual profit, the deal was expensive despite the vast amount of synergies. Net margins are depressed because of the relative greater leverage the company employs as a result of the acquisition.

Investors looking for current yield can find dividend yields in the range of 3-4% in each of the names, which corresponds to a net payout ratio of 50-60% of 2011 net income.

Company Last Price Market Capitalization Price/Sales Price/Earnings Dividend Yield Total debt
Conagra $26.84 $11.1bn 0.90x 13.6x 3.6% $2.2bn
General Mills $38.15 $24.6bn 1.65x 13.7x 3.2% $4.9bn
Kellogg $52.75 $18.9bn 1.43x 15.4x 3.3% $4.5bn
Kraft Foods $37.88 $66.9bn 1.23x 18.9x 3.1% $23.1bn

Investment thesis

Over the last decade both General Mills (+51%) and Kellogg (+51%) have shown healthy returns, comfortably outperforming the S&P500 which returned 25% over the time period. Conagra (+12%), which has been struggling to report earnings growth, and Kraft (-2%)-- which had the same problem and made an expensive acquisition of Cadbury-- notably underperformed.

For the next decade I place my bets on Conagra and General Mills, which are attractively valued-- and in the case of Conagra, have room for margin expansion. Kellogg seems to be fairly valued while Kraft is expensive and needs years before it can pay down its debt after its acquisition.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.