Seeking Alpha

Analyzing Consumer Staples Companies: Mondelez Is A Long-Term Buy

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Includes: BGS, CAG, CPB, FLO, GIS, HRL, HSY, K, KHC, KO, LANC, MDLZ, MKC, PEP, SJM, TR
by: Dividend Power
Dividend Power
Long-term horizon, dividend growth investing, Growth, long only
Summary

Consumer staples stocks can be a core part of many dividend growth portfolios. The companies tend to have stable earnings and cash flows, and growing dividends.

I analyze 17 consumer staples stocks relative to my threshold criteria for dividend growth stocks.

An analysis of dividend yield, payout ratio, TTM P/E ratio, trailing 5-year EPS growth beta, D/E ratio, and trailing 5-year and 10-year dividend growth rate is performed.

Only a few stocks currently rank high enough for further consideration.

Thesis

Consumer staples companies are favorites of many dividend growth and income investors. This is due to the long-term ability to raise the dividend and the relatively decent yields. These companies in general exhibit stable earnings and cash flows over long periods of time. Some are also Dividend Kings, Dividend Aristocrats, or Dividend Champions adding to their attraction. Furthermore, consumer staples companies are probably insulated from trade wars. Most generate the majority of their revenue from the U.S. or North America. I am long some of these stocks and they form a core part of my dividend growth portfolio. In this article, I compare 17 consumer staple stocks and then analyze them with my weighted ranking model. The highest ranked stock is Hormel Foods Corporation (HRL), which is no surprise. But I currently view this stock as a hold due to relative overvaluation. The second highest ranked stock is Mondelez International Inc (MDLZ), which I view as a long-term buy.

Consumer StaplesSource: MarketWatch

Background

In these analyses I use nine criteria that permit rapid quantitative screening based on the dividend, earnings growth, dividend growth, dividend safety, and valuation. The nine criteria used in quantitative screening are:

  • History of increasing dividends
  • Dividend yield
  • 5 Years EPS growth rate
  • 5 years dividend growth rate
  • 10 years dividend growth rate
  • Payout ratio
  • Long-term debt-to-equity ratio (D/E)
  • 5-year Beta
  • P/E Ratio for trailing twelve months

The goal here is to identify stocks for further research not make buy or sell decisions. There are often qualitative factors for each stock that must be researched before making an investment decision. For instance, I also evaluate P/E ratio relative to past 5-years or 10-years and dividend-to-FCF ratio. Other qualitative factors can also include management history, recent M&A activity, and effect of tariffs and trade wars on revenue.

Top 2 Consumer Staples Companies In Each Criteria

The table below lists the 17 consumer staples companies. The green highlighted rectangles in each column list the two stocks that rank the best in that criteria. The red highlighted rectangles indicate negative growth rates. The yellow highlighted rectangles indicate that the data was not available or applicable. For example, The Kraft Heinz Company (KHC) does not have a trailing 10-year dividend growth rate.

List of 17 Consumer Staples Stocks and Select Data

Consumer Staples Stocks

Source: Data from FinViz, Seeking Alpha, and Morningstar as of November 6, 2019

The two stocks that stand out in this analysis are B&G Foods Inc (BGS) and Hormel. The latter is not surprising as the company performs well in my analyses of the Dividend Kings. B&G Foods has a very high dividend yield, trailing 5-year EPS growth rate driven by acquisitions, and a low valuation. But investors should be cautious about B&G Foods as the dividend is not well covered by earnings or free cash flow. The company also has high debt and interest expenses. I have previously written an article suggesting that the dividend is at risk of a cut. I was also very bearish at the time. The stock price has declined over (31%) since then.

Hormel has high dividend growth rates, a low beta, and low debt. The company has raised the dividend for 53 consecutive years making it a Dividend King. The dividend is well covered by both earnings and free cash flow and the company has little long-term debt. There are some risks in that Hormel has exposure to volatile commodity prices. But Hormel should interest most investors at the right price. I am long Hormel and have written a detailed analysis of the stock.

Dividend Power’s Ranking Model

In this section I present a scaled ranking model using the aforesaid nine criteria and weight each one according to their importance to me. The model tends to reward stocks with better dividend growth characteristics. But saying that, stocks with low dividend safety or high valuation multiples tend to rank low. Companies with good scores tend to have Dividend Power scores of 9.0 or greater indicating that they are performing well in all nine criteria.

The model also accounts for a stock’s criteria rising above or falling below a critical value. If a criterion is above or below the critical value, then that criterion would be zero. For example, I want stocks that have a payout ratio below 100% but sometimes the payout ratio goes above 100% due to a drop in EPS resulting from economic headwinds or company specific short-term issues. The model assigns a zero for that specific criteria for these stocks. It is not a sell signal, but the stock will rank low and thus it may not be suitable for adding to the position at that time. Similar logic applies to other criteria.

The top three stocks in the in the ranking model in order are Hormel, Mondelez, and The Hershey Company (HSY). The lowest ranked stock in my model is Kraft Heinz, which is not surprising due to a negative trailing 5-year EPS growth rate, the recent dividend cut, and comparatively high beta for a consumer staples stock. The Dividend Power scores are given in the table below from highest to lowest. In general consumer staples stocks with no recent dividend growth or a dividend cut, negative trailing earnings growth, high debt-to-equity ratios, or high valuations are ranked low.

Dividend Power Scores for Consumer Staples Companies

Company

Ticker

Dividend Power Score

Hormel Foods Corporation

(HRL)

9.27

Mondelez International Inc

(MDLZ)

8.98

The Hershey Company

(HSY)

8.90

Lancaster Colony Corporation

(LANC)

8.90

PepsiCo Inc

(PEP)

8.15

McCormick & Company Inc

(MKC)

8.08

The J. M. Smucker Company

(SJM)

8.08

Flowers Foods Inc

(FLO)

7.92

General Mills Inc

(GIS)

7.75

Tootsie Roll Industries Inc

(TR)

7.68

The Coca-Cola Company

(KO)

7.53

B&G Foods Inc

(BGS)

7.21

Conagra Brands Inc

(CAG)

6.77

Kellogg Company

(K)

5.91

Campbell Soup Company

(CPB)

5.60

The Kraft Heinz Company

(KHC)

4.99

Source: Dividend Power calculations

Hormel is a solid company to own from the perspective of dividend growth investing, and it is a well-known and well-followed Dividend King. But the stock is trading at a high valuation at the moment, and my position is currently full. Hershey is also interesting and in addition the company has high margins and the stock has a low beta. But currently Hershey is currently trading at a high valuation. But my ranking model has also pointed to Mondelez as a buy candidate, which is not a stock that shows up on the radar of most dividend growth investors. Below I discuss Mondelez in greater detail.

Mondelez International Is A Long-Term Buy

Mondelez International (MDLZ) – In October 2012, Kraft Foods split into two companies, an international snack foods company known as Mondelez International, and a North American grocery company, Kraft Foods Group. The transaction was structured so Kraft Foods changed its name to Mondelez and then spun off Kraft Foods Group, which later became a part of Kraft Heinz. In 2014, Mondelez divested its coffee business. Today, Mondelez includes assets from Nabisco, LU Biscuits, and Cadbury. Mondelez is a market leader in biscuits (43% of sales) chocolate (31.5% of sales), gum and candy (13.5% of sales). The company has 16% of worldwide biscuit market share and 9% of global sugar candy market share. Mondelez has about 33% of the market for cookies in North America, 25% of the sugar candy market in Latin America, and 17% of the sugar candy market in Western Europe. Mondelez’ major brands include Nabisco, LU, Oreo, Chips Ahoy, Halls, Trident, Tang, Toblerone, belVita, and Cadbury. Arguably, after the 2012 spin off, Mondelez ended up with brands with more growth potential than Kraft Foods. In 2018, Mondelez had revenue of $25.94B. The company has a market capitalization of $71.19B.

Mondelez’ dividend is very safe from the context of earnings and free cash flow. The current payout ratio is 46.3% based on forward dividend of $1.14 per share and forward earnings per share of $2.46. This is a good value in my opinion and below my maximum criteria of 65%. In Q3 2019, the dividend required $378M and free cash flow was roughly $615M giving a dividend-to-FCF ratio of about 61%. This is also a good value and below my threshold of 70%. Debt and interest coverage also do not place the dividend at risk. At end of Q3 2019, short-term debt and current long-term debt was $6,927M while long-term debt was $12,593M offset by $1,537M in cash and cash equivalents. I would like to so more cash on hand but interest coverage is about 10X indicating that the company should be able to meet its obligations.

Mondelez is very profitable and margins have been trending up since 2012 as seen in the chart below. The average gross margin of the 17 consumer staples stock is about 37% so Mondelez compares well in context of controlling cost of goods. The company’s net interest margin is about 13% now and higher than the group average of ~7.8%. In general, I expect these upward trends to continue. Mondelez has brands with pricing power and so the company should be able to raise prices over time leading to higher margins. The company may not achieve margins on par with Pepsi or Coca-Cola but over time it may approach those of Hershey. Mondelez and Hershey are direct competitors in the areas of candy and chocolate, so I view this as a strong possibility.

Mondelez International Margins

Mondelez Profitability and Margins

Source: TIKR

Now let’s take a look at Mondelez’ valuation. The stock is currently trading at trailing price-to-earnings ratio of about 19.4. The forward P/E ratio is about 21.1. These values are slightly below that of the S&P 500’s average P/E ratio of 22.9. The current valuation is slightly higher than the average since 2013 of about 20.7. A fair value estimate using a multiple of 20.0 and forward EPS of $2.46 gives $49.20 per share. How does this compare to other valuation models? Morningstar provides a conservative discounted cash flow model valuation of $52. The Gordon Growth Model gives a fair value of $57 assuming an expected return of 8% and a reasonable dividend growth rate of 6%. The average of these models is $52.73, which is near the current stock price of $52.22. So the stock is no bargain, but the current price is probably a decent one for a starter position.

Final Thoughts On Consumer Staples Companies

Consumer staples companies can be a core part of many dividend growth portfolios. They tend to have consistent cash flows and earnings over time leading to long-term but slow dividend growth. The stocks also tend to have low betas, so they perform well during market down turns. However, earnings growth has recently been difficult to come by for the category as whole. This is due to more competition and a secular trend of consumers eating healthier foods and in restaurants. Investors should be selective when building a position in a consumer staples company. Mondelez is one stock that currently has both a reasonable valuation and a growing dividend although the yield is currently only near the market average. But I still view it as a long-term buy.

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Disclosure: I am/we are long PEP, KO, GIS, MDLZ, MKC, HRL. 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.