Mondelez: Double-Digit Dividend Growth Won't Last Forever

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About: Mondelez International, Inc. (MDLZ)
by: Robert & Sam Kovacs
Summary

Mondelez has good dividend safety and generates large amounts of free cash flow.

But the dividend is growing faster than the company's fundamentals.

This rate of growth is unsustainable over a decade.

Because of this and because of the low dividend yield, I don't see dividends contributing significantly to the company's returns in upcoming years.

However, I do expect the stock's price to keep appreciating in upcoming months.

Written by Sam Kovacs

Introduction

The food and beverage sector is getting attention in these bumpy markets. As more and more investors are getting jittery, more investors are looking for non-cyclical stocks to bolster their portfolios during these doubtful times. It is impossible to discuss the sector without mentioning Mondelez International (MDLZ). The global giant of biscuits and chocolates owns many crowd favorite brands: Oreo, Cadbury, Milka etc.

What is MDLZ worth to a dividend investor?

MDLZ is currently trading at $54.02 and yields 1.93%. My M.A.D Assessment gives MDLZ a Dividend Strength score of 35 and a Stock Strength score of 69.

This article will present and discuss the factors that show why I believe that dividend investors should avoid Mondelez International.

Source: mad-dividends.com

Mondelez International manufactures and markets snack food and beverage products like biscuits, chocolate, gum and candy, and beverages. The sale of biscuits and chocolate generate the most revenue for the company.

As you might have become accustomed to in my articles, I will first discuss the stock’s potential as a dividend producing investment. Next I will discuss the stock’s potential for capital appreciation relative to the total US stock market.

Dividend Strength

When I talk about a stock's dividend strength, I’m referring to its ability to continue paying me a significant and growing dividend for the foreseeable future. For this to be possible, the dividend needs to be safe. It also needs to show a good combination of dividend yield and dividend growth.

A common misconception about dividend investing is that no regard is given to total return. This is wrong, total return should always be the focus. Dividend investors simply decide to create portfolios where dividends contribute strongly to total returns.

Dividend Safety

A safe dividend is one that can continue to be paid and grown for a long time. The best way I know is to compare dividend payments to earnings, operating cashflow and free cashflows. Doing so quickly gives us an idea of the company’s underlying business.

44% of Mondelez International's earnings are paid out as dividends. This is a more attractive payout ratio than 45% of dividend stocks.

MDLZ pays 36% of its operating cashflow as a dividend, putting it ahead of 34% of dividend stocks.

Mondelez International has a free cashflow payout ratio of 50%, a better ratio than 45% of dividend stocks.

Mondelez International's payout ratio is sufficient according to these 3 metrics.

31/03/2015

31/03/2016

31/03/2017

31/03/2018

31/03/2019

Dividends

$0.5900

$0.6600

$0.7400

$0.8500

$1.0000

Net Income

$1.38

$4.60

$1.11

$2.12

$2.29

Payout Ratio

43%

15%

67%

41%

44%

Cash From Operations

$2.26

$2.24

$1.77

$2.35

$2.76

Payout Ratio

23%

27%

40%

35%

37%

Free Cash Flow

$1.23

$1.35

$1.00

$1.69

$2.01

Payout Ratio

48%

49%

74%

50%

50%

Source: mad-dividends.com

Mondelez has been able to maintain its dividend at 50% of free cashflow for the past years. The dividend has grown in line with the growth in the company’s free cashflow.

Given MDLZ’s high free cashflow coverage, I have no doubt that the company will be able to maintain its dividend in upcoming years.

Dividend Potential

Is the dividend going to contribute significantly to total returns?

Source: mad-dividends.com

Mondelez International's dividend yield of 1.93% is better than 38% of dividend stocks. With such a low dividend yield, I need very high dividend growth and fundamentals which back up that growth.

This last year, the dividend grew 18% which is higher than their 5 year CAGR of 13%.

Source: mad-dividends.com

While this level of growth seems attractive, is it sustainable? Over the previous 3 years Mondelez has seen its revenues decrease at a -3% CAGR and net income go down at a -23% CAGR.

Since spinning off Kraft Foods (KHC) in 2012, revenues have decreased year after year.

Source: mad-dividends.com

Facing a tough market environment, the company spent the past years focusing on cutting costs, and is now focused on growing volume.

However, if this last quarters results are in any way representative of the company’s growth going forward, we can only expect low to mid single digit growth in top and bottom lines.

If the company can continue to grow its revenue and net income at the current rate, MDLZ’s dividend has decent potential for growth. However, even though management has been aggressively growing dividends since the Kraft Foods spin-off, one might wonder how long this high dividend growth can last for. Within a few years of growing dividends at a double digit rate while earnings only grow at a single digit rate, payout ratios will climb higher and higher.

As such, while I believe management is committed to grow its dividend aggressively in upcoming years, I wouldn’t be surprised if after a few years we saw dividend growth slow down to reflect the growth in underlying business.

Dividend Summary

The combination of the data presented above gives MDLZ a dividend strength score of 35 / 100. The low dividend yield and sluggish revenue and net income growth make it less attractive than the payout ratios would have suggested.

While I believe the dividend won’t be cut under any circumstances in upcoming years, I fail to see how it will be able to contribute significantly to returns.

As such, I’d advise dividend investors to consider switching MDLZ out of their portfolios.

Stock Strength

Unfortunately, as much as I love Oreo's, MDLZ doesn’t pass the bar for dividend investors. With that in mind, when should existing investors sell? To figure this out, I assess the factors which have most influenced stock market movements in the past century: value, momentum, financial strength and earnings quality. By sorting all of these stocks according to these factors, investors can get an edge and know which stocks, on average, will beat or underperform the market.

Value

Valuation must always be a big decision when choosing when to buy or sell a stock. Arguably you don’t want to buy a stock when it is overvalued, and you don’t want to sell it when its undervalued.

To assess value I consider multiples of earnings, sales, cashflows, as well as dividend and buyback yields, which when combined give an often overlooked ratio: the shareholder yield.

  • MDLZ has a P/E of 23.59x
  • P/S of 3.05x
  • P/CFO of 19.56x
  • Dividend yield of 1.93%
  • Buyback yield of 4.11
  • Shareholder yield of 6%.

According to these values, MDLZ is more undervalued than 59% of stocks. While the stock is trading at relatively high multiples of revenue, net income and sales, the company shares high amounts of its excess cashflow with shareholders, resulting in an attractive 6% shareholder yield. The balance of the above data would suggest that MDLZ is fairly valued. Not excessively overvalued, but not cheap either.

Source: mad-dividends.com

Furthermore, the chart above suggests that MDLZ is trading around its 5 year average PE. This confirms the assertion made above, that MDLZ is fairly valued. Any growth in stock price from now on could push the stock into overvalued territory.

Value Score: 59 / 100

Momentum

The trend is your friend. This is probably the most repeated maxim in the investment community after “buy low sell high”. There’s a good reason for that: short term momentum is usually very representative of performance in the next 12 months.

The stocks with the worst relative strength will usually underperform the market, while those with the best relative strength will usually continue to outperform.

Mondelez International's price has increase 15.40% these last 3 months, 23.33% these last 6 months & 37.39% these last 12 months and now currently sits at $54.02.

Source: mad-dividends.com

MDLZ has better momentum than 92% of stocks, which I find to be fantastic. Trending stocks have the wind in their backs, and sustained increases in prices over the past 3, 6 and 12 months usually are signs that money will continue flowing into these stocks in upcoming months.

Momentum score: 92 / 100

Financial Strength

While momentum and value are indicators which can drive price movements over the next few quarters, financial strength has a more subtle, long term effect.

During recessions, stocks with the worst financial strength get slaughtered. Those with great financial strength find it easier to generate superior returns in good times, driving up their results, which in turn drives their stock prices higher.

MDLZ' Debt/Equity ratio of 1.5 is better than 49% of stocks. Mondelez International's liabilities have increased by 1% this last year. The company’s operating cashflow can cover 10.5% of liabilities.

These ratios would suggest that Mondelez International has better financial strength than 62% of stocks. The level of liability coverage as well as the level of gearing are just average, but the low level of liability increase shows that Mondelez hasn’t been increasing its financial leverage significantly.

All in all MDLZ’s financial strength is better than the median US stock, but isn't worth getting overly excited about.

Financial Strength Score: 62/100

Earnings Quality

Finally by looking at a few ratios, such as the rate at which stocks depreciate their assets relative to capital expenditure, as well as the amount of accruals the company records, can tell a lot about future earnings.

Mondelez International’s Total Accruals to Assets ratio of -2.8% puts it ahead of 27% of stocks. 80.1% of MDLZ's capital expenditure is depreciated each year, which is better than 33% of stocks. Each dollar of MDLZ's assets generates $0.4 of revenue, putting it ahead of 39% of stocks.

Based on these findings, MDLZ has higher earnings quality than 23% of stocks. The company’s asset base isn’t as efficient as other stocks in the sector. The low level of negative accruals won’t have any significant impact on future earnings, but the low levels of depreciation could end in asset write-downs and write-offs which significantly reduce earnings in the future.

Earnings Quality Score: 23 / 100

Stock Strength Summary

When combining the different factors of the stocks profile, we get a stock strength score of 69 / 100 which suggests that investors who want to sell MDLZ but are looking for the right time to do so might want to wait. The stock’s valuation isn’t yet stretched, and the great momentum should see the stock go higher in the next few quarters. If you booked a significant gain over the course of the last year, you might want to start reducing your exposure to the stock as its price keeps climbing.

Conclusion

With a dividend strength score of 35 & a stock strength of 69, Mondelez is a subpar choice for dividend investors, because of the low dividend yield which won’t be able to be backed forever by high dividend growth. However, those who own the stock might want to wait a little while. I expect non cyclical stocks to continue performing well in this market environment, and Mondelez should follow suit.

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Note: To learn more about the Machine Assisted Dividends (M.A.D.) methodology, you can read this post, which my father Robert Kovacs published. All financial data from my company mad-dividends.com is sourced directly from the SEC, whereas pricing data comes from IEX.

Disclosure: I/we 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.