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Those ROE figures didn't look bad, but they were somewhat erratic. Let's dig a little deeper. The price to earnings ratio is above 23, which seems very expensive for a large and mature company. Kellogg pays a divided of a little under 3%, which has grown substantially over the last 10 years. The future growth rate of the dividend appears to be in doubt however as the dividend payout ratio is 65%. Upon further inspection the free cash flow has not been growing as consistently as the earnings per share the company has been reporting. This signals to me some underlying weakness. In the table above you can see that the earnings per share growth has been slowing for some time, and is only averaging a paltry 4% over the past 10 years. I like to discount my future earnings at 5%, which is historically the interest rate of “safer” investments. 5% has also generally exceeded the rate of inflation, which is why I'm comfortable with it. Using the valuation model in the table, you are theoretically loosing value every year, because the assumed earnings growth is less than the assumed discount rate. Therefore, I have no interest in purchasing stock in Kellogg anywhere near these levels.
The Street (8/25/13) rated Kellogg a BUY
S&P Capital IQ (8/24/13) rated a BUY, with a 1 year price target of $70.00
Ford Equity Research (8/23/13) rated it a HOLD
Disclosure: I do not own K. This valuation is for informational purposes only and does not constitute a recommendation to buy, sell, or hold any securities.