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Mondelez International: Sweeten Your Dividend Growth Portfolio

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About: Mondelez International, Inc. (MDLZ), Includes: HRL, HSY, KDP, KHC, KO, MKC, PEP
by: Dividend Power
Dividend Power
Long-term horizon, dividend growth investing, Growth, long only
Summary

Mondelez International is a global leader in snacks with No. 1 or No. 2 positions in biscuits, candy, chocolate, and gum.

The company is growing the top and bottom lines organically.

The dividend has been raised for six consecutive years since the 2012 divestment of Kraft Foods.

The dividend is well covered by earnings and free cash flow.

The stock is slightly undervalued at the current price.

Investment Thesis

Mondelez International Inc. (NASDAQ:MDLZ) is a consumer staples company that is likely not on the radar of many dividend growth investors. The company has had only six years of dividend growth, so it often fails to meet the threshold of dividend growth investors who often look for 10 years or more of dividend growth. Furthermore, the yield is low at only about 2.16%. But well-managed consumer staples companies can form the core part of a dividend growth portfolio. I only have to point the long-term dividend growth success of Hormel Foods Corporation (HRL), McCormick & Company (MKC), The Coca-Cola Company (KO), and PepsiCo Inc. (PEP) to validate this perspective. Mondelez has well-known market leading brands, a low payout ratio, low debt, a growing dividend, and the stock price is not volatile. These are all attractive characteristics. In addition, Mondelez ranked highly in my ranking model of consumer staples stocks with a Dividend Power Score of 8.98. For these reasons, I view Mondelez as a long-term buy.

Mondelez LogoSource: Mondelez International

Overview of Mondelez

In October 2012, the old Kraft Foods split into two companies, an international snack foods company known as Mondelez International, and a North American grocery company, Kraft Foods Group, which is now part of the Kraft Heinz Company (NASDAQ:KHC). The transaction was structured so Kraft Foods changed its name to Mondelez and then spun off Kraft Foods Group. In 2014, Mondelez divested its coffee business into a joint venture. Today, Mondelez includes assets from Nabisco, LU Biscuits, and Cadbury. The company has a 26.4% stake in JDE and 13.8% stake in Keurig Dr. Pepper (NYSE:KDP). Mondelez is the global market leader in biscuits, chocolate, candy, and the No. 2 in gum. Mondelez's major brands include Nabisco, LU, Oreo, Ritz, Chips Ahoy, Halls, Trident, Tang, Toblerone, belVita, and Cadbury. In 2018, Mondelez had revenue of $25.94B. Revenue is divided into biscuits (43% of sales) chocolate (32% of sales), gum and candy (13% of sales), cheese & grocery (7% of sales), and beverages (5% of sales).

Mondelez Brands

Mondelez BrandsSource: Mondelez International

Mondelez Growth and Profitability

Through various strategic moves, Mondelez has emerged as a global leader in snacking. The company is well positioned in categories that are growing faster than the broader consumer staples market. This includes global brands in chocolate, biscuits, candy, and gum with leading market positions in many major markets. The company is a major player in all four of these categories in established markets of North America and Europe and emerging markets of China, India, Brazil, and Russia.

Mondelez Major Markets

Mondelez Global MarketsSource: Mondelez 2019 Fact Sheet

Top-line growth will likely come about through a combination of organic sales and acquisitions. Mondelez has generated organic sales growth at time when most consumers staples companies are struggling to do so. I attribute this to the company's position in the aforesaid categories. Mondelez is able to grow both volume and pricing due to marketing, brand innovation, and expanding distribution. The company is differentiating between global brands and local brands and trying to expand the former and maintain relevance for the latter. So far, Mondelez has been successful with this strategy. Organic annual sales growth has accelerated in Europe and North America, the two largest markets leading to company-wide acceleration of the top line. Mondelez generated between 2.1% and 2.8% core snacks category growth from 2016 to 2018. In 2019, year-to-date growth will likely exceed 4%.

Mondelez also seemingly views M&A as a strategic initiative. This is not surprising since the company in its present form was founded on a series of acquisitions. Mondelez tried to acquire the Hershey Company (HSY) in 2016 to build scale in chocolate. I view a repeat attempt as unlikely for three reasons. First, Hershey is controlled by the Milton Hershey School Trust, which has 80% voting power, and they have already rebuffed Mondelez once. Second, a large acquisition would likely face anti-trust challenges. Third, the stock price of Hershey has almost doubled since 2016 and is now trading at an earnings multiple of 26X. This makes an acquisition prohibitively expensive. But with that said, Mondelez is conducting smaller bolt-on acquisitions, which avoids anti-trust issues. Recently, the company acquired a major stake in Perfect Snacks, made a minority investment in Hu Master Holdings, and took a minority investment in Uplift Foods. These brands will not move the needle much for a company the size of Mondelez. But it does position Mondelez to complete an acquisition if any of these small brands gain scale. It also gives Mondelez a pipeline of talent in a very competitive market.

Mondelez is a very profitable company, and margins have been trending up since 2012 when the company took its current form. Mondelez has gross margins that are now ~39%. This is greater than most other consumer staples companies. Gross margins are not at the level of Pepsi (~55%) or Coca-Cola (~61%), but they are on par with McCormick (~41%) and just shy of Hershey (~46%). This means that Mondelez controls cost of goods at nearly the same level as some of the best global consumer staples companies. Gross margins should continue to trend up with time for two reasons. Mondelez is able to raise prices of its products, and the company is seemingly committed to maintaining cost discipline. For Mondelez, that means controlling input cost inflation, labor costs, and logistics costs. Mondelez is also very profitable and has very good operating margins of about 14.5% and net profit margins of about 13% that compare well with other leading consumer staples companies. These values will likely trend up with time due to increasing scale and cost controls.

Mondelez Revenue and Margins Since 2012

Mondelez Revenue and MarginsSource: TIKR.com

Mondelez's Dividend And Safety

Mondelez's dividend is growing at a double-digit rate right now. But this is off a low base and a low payout ratio after the 2012 divestment of Kraft Foods. The payout ratio is still comparatively low for a consumer staples company. But, still, the dividend growth rate should slow some in the next few years. However, Mondelez's dividend is very safe from the context of earnings and free cash flow. The current payout ratio is about 46% based on forward dividend of $1.14 per share and forward earnings per share of $2.47. 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. Interest coverage is about 4.5X, a bit low, but the company should be able to meet its obligations.

Mondelez Balance Sheet and Debt Metrics

Mondelez Balance Sheet and Debt MetricsSource: Dividend Power based on data from Morningstar

Mondelez's Valuation

Now, let's examine the valuation of Mondelez. The forward P/E ratio based on consensus 2019 EPS of $2.47 is now about 21.3, near the average since 2012 of about 21.0. Applying a sensitivity analysis using P/E ratios between 20.0 and 22.0, I obtain a fair value range from $49.40 to $54.34. The current stock price is ~97% to ~106% of my estimated of fair value. The current stock price is ~$52.54 suggesting that the stock is trading in the range of its expected fair value.

Estimated Current Valuation Based On P/E Ratio

P/E Ratio

20.0

21.0

22.0

Estimated Value

$49.40

$51.87

$54.34

% of Estimated Value at Current Stock Price

106%

101%

97%

Source: dividendpower.org Calculations

How does this compare to other valuation models? We next apply the Gordon Growth Model. The dividend growth rate is fairly high right now. But since the payout ratio has risen, we make the assumption that the dividend will grow at 6% rate over longer periods of time and that we want an 8% return. This gives a fair value estimate of $57. In another method, Morningstar is known to use a fairly conservative discounted cash low model and provides a fair value of $52. An average of these three models is ~$53.62. Seemingly, Mondelez is slightly undervalued at the current price. There is not a lot of uncertainty for Mondelez. Morningstar gives it a wide economic moat with a stable trend. Value Line gives the stock a financial strength rating of 'A', a stock price stability of 90, and an earnings predictability of 95. My ranking model of 17 consumer staples companies gives a Dividend Power score of 8.98, placing it second on the list. Hence, a large discount is not warranted here to take an entry position or add to an existing position. I personally view the current stock price as a good one. But for those desiring a discount, a ~10% discount from the average of the three valuation models is probably fine. So, a stock price of ~$48.26 or less would be OK. The table below summarizes this discussion.

Mondelez's Valuation Model Summary

Company

Current Price

Average of Valuation Models

10% Discount to Average of Valuation Models

Dividend Power Score (9 is baseline)

Mondelez

$52.54

$53.62

$48.26

8.98

Source: Dividend Power

Final Thoughts On Mondelez

Mondelez is a global leader in snacking with No. 1 or No. 2 positions in biscuits, candy, gum, and chocolate. The company's performance is accelerating in 2019 from the perspective of organic revenue growth and adjusted EPS. This suggests that the company is executing well in a competitive environment for consumer staples companies. Mondelez should be able to continue growing the top and bottom lines organically and through bolt-on acquisitions. In turn, this should lead to more dividend growth albeit at a slower rate since the payout ratio has risen. The dividend is seemingly safe from an earnings, free cash flow, and debt perspective. Although the stock is not very undervalued at the moment, the company recently beat estimates in Q3 2019 and raised guidance. For these and the aforesaid reasons, I view Mondelez as a long-term buy.

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