This article is about Mondelez International (NASDAQ:MDLZ) and why it's a buy for the income investor long term and the total return investor who also wants the potential for future moderate growth. Mondelez International is one of the largest global manufactures and marketers of snack food and beverage products. MDLZ is an investment for the total return investor who also wants a steady income while the world economy increases.
When I scanned the five-year chart, I saw Mondelez International has a fairly good chart, going up and to the right with the last two years being flat.
Fundamentals of Mondelez International will be reviewed on the following topics below.
- The Good Business Portfolio Guidelines
- Total Return and Yearly Dividend
- Last Quarter's Earnings
- Company Business
- Takeaways
- Recent Portfolio Changes
I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.
Good Business Portfolio Guidelines.
Mondelez International passes 11 of 11 Good Business Portfolio Guidelines, a good score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.
- Mondelez International does not meet my dividend guideline of having dividends increase for 7 of the last ten years and having a minimum of 1% yield, but we will give it a pass because it has only been around for five years, after its spinoff. Mondelez International has five years of dividend raises since it was spun off as a separate company, and a 2.0% yield. Mondelez International is, therefore, a good choice for the dividend income investor who wants a steady growing income. The five-year average payout ratio is low at 43%. After paying the dividend, plenty of cash remains for increasing the business and buying back shares.
- I have a capitalization guideline where the capitalization must be greater than $7 billion. MDLZ easily passes this guideline. MDLZ is a large-cap company with a capitalization of $28 billion. MDLZ's 2018 projected cash flow at $3 billion is solid, allowing the company to have the means for company growth.
- I also require the S&P SFRA CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.3% of the portfolio as income, and I need 1.8% more for a yearly distribution of 5.1%. The three-year forward CAGR of 9% passes my guideline requirement. This good growth for MDLZ can continue as the world economy continues to grow.
- My total return guideline is that total return must be greater than the Dow's total return over my test period. MDLZ passes this guideline since its total return is 75.11%, more than the Dow's total return of 58.60%. Looking back five years, $10,000 invested five years ago would now be worth over $16,900 today. This makes Mondelez International a good investment for the total return investor looking back - one that has future growth as the economy continues to grow.
- One of my guidelines is that the S&P rating must be three stars or better. MDLZ's S&P CFRA rating is four stars, or a buy, with a target price of $49 - thus passing the guideline. MDLZ's price is presently 11.0% below the target. MDLZ is under the target price at present and has a fair PE of 20, making MDLZ a fair buy at this entry point, with growth to come looking forward. If you are a long-term investor who wants present income with the potential for moderate growth you may want to look at this company.
- One of my guidelines is whether I buy the whole company if I could. The answer is yes. The above average total return makes MDLZ a good business to own for total return with the potential for continued growth. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, that make a fair profit, that invest profits back into the business and that also generate a good income stream. Most of all, what makes MDLZ interesting is the potential long-term growth of their business as the demand for more of their products increases, especially at Super Bowl time.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with, and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Mondelez International passes this total return guideline against the Dow baseline in my 48.0-month test. I chose the 48.0-month test period (starting January 1, 2014, and ending to date) because it includes the great year of 2017, and other years that had fair and bad performance. The good total return of 75.11% makes Mondelez International a good investment for the total return investor looking back. MDLZ has an average dividend yield of 2.0% and has had increases for five years since it was spun off. The dividend is expected to be increased August 2018 to $0.25/qtr. from $0.22/qtr., or a 14% increase.
DOW's 48.0-month total return baseline is 58.60%.
Company Name | 48.0 Month total return | Difference from DOW baseline | Yearly Dividend percentage |
Mondelez International | +75.11% | 16.51% | 2.0% |
Last Quarter's Earnings
For the last quarter on October 30, 2017, Mondelez International reported earnings that beat by $0.03 the expected earnings at $0.57, and compared to last year at $0.50. Total revenue was higher at $6.53 billion, up more than a year ago by 2%, beating expected revenue by $80 million. This was a good report with bottom line and the top line increases. The next earnings report will be out late January 2018 and is expected to be $0.56 compared to last year at $0.46 a good increase.
The graphic below summarizes the quarter's earnings compared to last year's quarter.
Source: MDLZ Earnings call slides
Business Overview
Mondelez International is one of the largest companies that manufactures and markets snack food and beverage products in the United States and foreign countries.
As per Reuters,
Mondelez International is a snack company. The Company manufactures and markets snack food and beverage products for consumers. It operates through four segments: Latin America, Asia, Middle East, and Africa ( AMEA), Europe and North America. As of December 31, 2016, its brands spanned five product categories: Biscuits (including cookies, crackers, and salted snacks); Chocolate; Gum and candy; Beverages (including coffee and powdered beverages), and Cheese and grocery. Its portfolio includes various snack brands, including Nabisco, Oreo, LU and belVita biscuits; Cadbury, Milka, Cadbury Dairy Milk and Toblerone chocolate; Trident gum; Halls candy, and Tang powdered beverages. The Company sells its products to supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, distributors, convenience stores, gasoline stations, drug stores, value stores and retail food outlets. As of December 31, 2016, it sold its products to consumers in approximately 165 countries."
Overall Mondelez International is a good business with a 9% CAGR projected growth as the United States and foreign economies grow going forward, with the increasing demand for MDLZ's products. The average dividend income brings you a steady cash flow each year with further growth of their dividend as their product demand increases.
The graphic below shows the good cash flow and value to the shareholders.
Source: MDLZ Earnings call slides
The Fed has kept interest rates low for some years, and I believe that they will go slow in 2018. This should help keep the economy on a growth path. If infrastructure spending can be increased this will even increase the United States growth going forward.
From October 30, 2017, earnings call Irene Rosenfeld (Chief Executive Officer and Chairman) said:
Q3 was a good quarter on both the top and bottom lines. Organic net revenue 2.8% fueled marginally by the strength of our Power Brands improving momentum in emerging markets and strong performance in Europe. We estimate that our top-line results included a benefit of approximately 60 basis points associated with recovery from the malware incident as we recaptured some delayed shipments from the end of Q2.
Of course, we had some challenges in the quarter from hurricanes, earthquakes and the India GST, but they netted out to a very small number. On the bottom line, we delivered another quarter of strong adjusted operating income margin expansion and double-digit adjusted EPS growth. We're pleased with the underlying growth drivers. Our Power Brands grew 3.8%, significantly outpacing the category with Milka and Cadbury Dairy Milk in chocolate and Oreo and belVita in biscuits performing especially well.
Emerging markets grew 4.8% including positive volume growth. Key markets have fueled revenue growth included India, Russia and Mexico. We think sequential acceleration in emerging market category growth consistent with our view that these markets are generally improving and we’re well positioned to win as conditions continue to improve. Developed markets grew 1.6%, led once again by Europe.
Our performance in chocolate was strong across nearly all of our largest markets in the region. For example, in Germany, we expanded market share on a year-to-date basis with distribution gains and the solid performance of Milka. And in the UK, our Cadbury sponsorship of the Premier League also drove strong share gains. Our growth strategies continue to gain traction. We're contemporizing our core by distorting resources behind our Power Brands and by upgrading the well-being credentials of our portfolio."
The graphic below summarizes the company's global growth over the last year.
Source: MDLZ Earnings call slides
This shows the feelings of top management for the continued growth of the Mondelez International business and shareholder return with an increase in future growth. MDLZ has good brands, and with continued demand for their excellent products, MDLZ will grow as the world economy increases.
Takeaways
Mondelez International is a good investment choice for the total return investor and income investor with its record of dividend increases and moderate continued growth potential. Mondelez International is 1.26% of The Good Business Portfolio, and the position will be increased when cash is available. The Good Business Portfolio limits the total number of positions to no more than 25. If you want steady dividend income and good growth potential in the snack-food-product business, MDLZ may be the right investment for you.
Recent Portfolio Changes
- Wrote some L Brands (LB) May 18, strike 52.5 calls on the part of the holding. If the calls are in the money near exercise time, they will be moved up and out. I intend to sell L Brands sometime this year but am having too much fun selling covered calls.
- On January 18 trimmed Boeing (BA) from 12.7% of the portfolio to 12.5%. I am greedy and am letting BA be much more a part of the portfolio than reasonable money management should allow.
- Wrote some L Brands February 16, strike 50.0 calls on the part of the holding. If the calls remain in the money near exercise time, they will be moved up and out.
- Increased the position size of General Electric (GE) to 3.0% from 2.7% of the portfolio. GE has now become a value and income play. GE is a problem child at this point and will be held in the portfolio. You have to let the new CEO have some time to turn around this giant company.
- On January 5 trimmed Boeing from 11.5% of the portfolio to 11.4%. I am greedy and am letting BA be much more a part of the portfolio.
- Wrote some L Brands February 16, strike 60.0 calls on the part of the holding. With the recent drop in LB price this position will be closed and new calls written around the $50 strike.
- On December 12 trimmed Boeing from 11.5% of the portfolio to 11.3%. A great company, but you have to be diversified. Boeing is getting a bit pricey at this point.
- Wrote some L Brands February 16, strike 57.5 calls on the part of the holding. If the calls remain in the money near exercise time, they will be moved up and out.
- On November 29 trimmed Boeing from 11.2% of the portfolio to 11.0%. A great company, but you have to be diversified. When will Boeing split?
- On November 16 trimmed Boeing from 11.4% of the portfolio to 11.2%. A great company, but you have to be diversified. The Dubai Air Show was great for Boeing, and they beat Airbus in orders.
- Added a starter position of 3M (MMM), at 0.5% of the portfolio. They have a good steady dividend history, a dividend king with 58 years of increasing dividends and great total return. Please see my article on 3M, "3M: Dividend King with Great Total Return".
The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are Johnson & Johnson (JNJ) at 8.5% of the portfolio; Altria (MO) at 6.9%; Home Depot (HD) at 9.3%; and Boeing at 12.3% of the portfolio. Therefore BA, JNJ, and Home Depot are now in trimming position, with Altria getting close.
Boeing is going to be pressed to 12% of the portfolio due to it being cash positive on 787 deferred plane costs at $316 million in the first quarter, an increase from the fourth quarter. The second quarter saw deferred costs on the 787 go down $530 million, a big jump from the first quarter. Second-quarter earnings were fantastic with Boeing beating the estimate by $0.25 at $2.55. Third quarter earnings were $2.72, beating the expected by $0.06, with revenue increasing 1.7% year over year - another good report.
JNJ will be pressed to 9% of the portfolio because it's so defensive in this post-Brexit world. Earnings in the last quarter beat on the top and bottom line and Mr. Market did like the growth going forward. JNJ is not a trading stock but a hold forever.
For the complete Good Business Portfolio list and performance, please see my article on The Good Business Portfolio: 2017 3rd Quarter Earnings and Performance Review. Become a real-time follower, and you will get each quarter's performance after the earnings season is over.
I have written individual articles on JNJ, EOS, GE, IR, MO, BA, PEP, AMT, PM, LB, OHI, DLR and ADP that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest, please look for them on my list of previous articles.
Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.
