2021 Week 21: Kellogg Co. (NYSE: K)

Portfolio Update

The FiveTwenty portfolio received $12.18 in dividends in the past week. PG paid its quarterly dividend during the week.

Past Week Dividend$12.18
Current Quarter Dividend (Q2 2021)$112.67
LifeTime Dividend$225.71
Estimated Annual Dividend$1,625.01
Dividend Scorecard

The capital allocation for the week of 05/23/2021 to 05/29/2021 will be used to establish a position in Kellogg Co. (NYSE: K)

K – Company Profile

Kellogg Co (K) manufactures and markets ready-to-eat cereal and convenience foods. The company operates through four segments: North America; Europe; Latin America; and Asia Middle East Africa. Some of the company’s best known brands are: Pringles, Cheez-It, Special K, Kellogg’s Frosted Flakes, Pop-Tarts, Kellogg’s Corn Flakes, Eggo, Kashi, RXBAR, and more. Official Site | Wikipedia

Dividend Streak18 years
Yield3.43%
Payout Ratio55.34%* (GAAP 62.87%)
P/E16.14* (GAAP 18.02)
Entry Criteria Scorecard

* computed using TTM adjusted EPS of $4.12 as of Q1 2021

Financials

Does K have the financial means to sustain and raise its dividend going forward?

Over the last decade, K’s revenues have seen very little overall growth. Revenues topped out at $14.8 billion in 2013 followed by a decline to $12.9 billion by 2017, and ended up at $13.8 billion in FY 2020. Net income has seen similar trends. However, the return to more consistent top line growth K experienced over the last 3 years are encouraging to see.

In the last 10 years, GAAP EPS for K have shown similar volatility and stagnation as GAAP net earnings. On the other hand, adjusted EPS showed a more consistent growth trend. The $3.31 adjusted EPS in 2012 grew to $3.99 by 2020. A 2.1% CAGR rate over the 9 years.

The average dividend per share growth rate was 3.90% per year in the past 10 years and 2.50% per year in the past 3 years. (per GuruFocus) The payout ratio as a percentage of adjusted earnings has stayed between a low of 47% and a high of 57%.

K in 2020 and beyond

For FY 2020 K saw a 1.4% increase in net sales over the prior year. Strong organic net sales growth of about 6.0% compared to FY 2019 were offset by the revenue loss from divestitures in July 2019 and unfavorable foreign currency. As for COVID-19, while the pandemic increased operating cost for the company it also resulted in increased demand for the K’s products.

K started FY 2021 with a strong Q1. Revenue grew 5.1% and adjusted EPS grew 12.1% compare to Q1 of FY 2020. The company experienced robust growth in Latin America (+10%) and AMEA (+14%) (Asia Pacific, Middle East and Africa) regions. Furthermore, K revised its full year guidance upwards during the earnings report. Revenue is expect to be flat compared to previous guidance of a 1% decline. Adjusted EPS are expected to increase 1%-2% compared previous guidance of a 1% increase.

Valuation

Are we paying too much for K at the current share price?

In the last 10 years, K’s P/E ratio (base on GAAP earnings) saw a low of 11.65 and a high of 69.61, with a median value of 18.67. (per GuruFocus) Currently, the shares trade at a P/E ratio of 18.02 on GAAP and 16.14 on adjusted TTM earnings.

The current share price of $66.50 is 4.4% above the 50-day moving average and 5.0% above the 200-day moving average. Additionally, the share price is near the 60th percentile of the 52 week trading range.

Following its latest earnings report on 5/6/2021, K share price has seen a small jump. However, we believe the share price still offers a reasonable entry point into K.

Yield

How does the current dividend yield for K compare to historical values?

In the last 10 years, the dividend yield for K has been in a range of 2.33% to 4.22%, with a median of 3.05%. (per GuruFocus) The current TTM yield of 3.43% is significantly above the historical median.

Furthermore, on 4/30/2021 the company raised its quarterly dividend to $0.58 from $0.57, making it the 18th consecutive year of dividend increases for the company. The raise represents a 2% increase in the dividend.

Thesis

Why are we adding K to the FiveTwenty portfolio?

K has a strong stable of consumer brands. It has completed a number of portfolio realignment and cost cutting initiatives and seems poised to resume organic top line growth. Additionally, the shares price offers an attractive dividend yield and valuation.

Additional Research


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