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Kellogg Is Still a Solid Investment

June 21, 2014 | About:
Vinay Singh

Vinay Singh

5 followers

Amidst all of the hoopla about healthy eating, there is one thing that stands tried and true -snacks and other convenience foods tend to taste great - and because of this, sales continue to boom. One manufacturer of such items, Kellogg (K), has been proving this for over 100 years, with no sign of slowing down, and this could mean profits for investors who are also, to quote Tony the Tiger, "Grrrrrrreat!"

What do the numbers really tell?

While sales of a company's products may tell one story, it's really the overall picture that potential investors should take to heart. For Kellogg, this picture looks bright. First, the company posted significant increases in gross and operating profit margin, very strong for both the food industry and the market as a whole.

In addition, Kellogg upped its net operating cash flow in the first quarter in excess of $380 million, as compared to the same quarter of last year. This is one of the reasons that has prompted the company's share price to rise more than 18% so far this year.

Kellogg's dividend payout of $1.76 per share equates to a healthy dividend yield of 2.7%, a nice amount of income receipt for investors who opt to hold the shares, especially for the long term.

Seeking revenue in unlikely sources

One of the ways that Kellogg has kept performance strong is by providing alternatives in both itsfood and beverage options. Last year, for example, the company purchased the Pringles potato chip brand from Proctor & Gamble. Kellogg paid cash for this acquisition, which will take it to the number two position in the worldwide savory snacks category.

This was a real boon to Kellogg, as the company, and its competition, are finding it more andmore difficult to compete with generic knock-off products on its once-top-sellers such as Rice Krispies and the infamous Kellogg's Corn Flakes.

Cereal - it isn't what's for breakfast anymore

It certainly goes without saying that the food and beverage market is quite competitive. One ofKellogg's toughest competitors is General Mills. This company has posted somestrong numbers of late, including a double-digit rise in net income. In addition, the firm's sharesare trading at 18 times trailing earnings, meaning that General Mills may possess a higher rateof growth than normal.

Here, too, is a company that's had its shares recently reach a 52-week high, an increase of nearly 25% year to date. One reason for this could be the company's heavy advertising, pushing more of its healthy options, such as "heart healthy" Cheerios and Nature Valley granola bars.

General Mills currently trades at a lower EV/EBITDA of 11.4 times, compared to Kellogg’s 15 times. Backed by its strong net income, General Mills has reported impressive cash flows in the recent years. This enables General Mills to pay its shareholders a decent dividend yield of 3%. Moreover, strong operational performance in the last three years has enabled the company to increase its dividend by more than 15%. For these reasons, I think General Mills is definitely worth a look for investors.

Not to be left in the dust, Nestle has also turned the corner intohealthier, alternative snack foods. While this company's infamous Nestle chocolate bar candy can still be found in grocery stores, convenience stores, and other countless locations,consumers today are more likely to see Nestle's Pure Life bottled water and Power Bar also inthe forefront

Nestle has also continued its foray into the senior market with nutritional products like Boost, ahealth enhancing drink containing vitamins and minerals. Likewise, Nestle's presence in the petcare market can also be felt with the likes of Purina Dog and Cat Chow, thus creating profitpotential from numerous avenues.

The company currently has almost 30 brands with sales of over a billion each. Almost all of them have contributed to Nestle's strong organic growth in the recent years. Nestle has indicated to shareholders that it has a long-term target of achieving almost 6% sales growth for the next five years. This will help the company to achieve a steadily improving trend in EBIT growth and, thus, return on capital invested.

Nestle is also a proud member of the worldwide dividend index, as the company has raised its dividend incessantly for more than 15 years in a row. Though the company did recently announce plans to reduce its payout ratio to 55% from the current 60%, increased earnings will help investors enjoy the same sweet dividend from Nestle as before. Also, a reduced dividend payout is always considered a healthy move by long-term investors, as their dividends then become less vulnerable to short-term earnings fluctuations.

Similar to Kellogg, it has been essential for both General Mills and Nestle to branch out intoother revenue-producing areas in order to increase profit potential, especially in the recentlyroughed up economy.

By touting more healthy food and drink alternatives, yet still standing behind its tried and trueproducts like Frosted Flakes, Kellogg and its competitors have seen upward moving shareprices, a nice reward for the bottom line and for shareholders alike.

The bottom line

Overall, the strengths of Kellogg can be seen in a variety of different areas, including thecompany's revenue growth, nice operational cash flow, rising profit margins, and a very solidperformance of its share price. Knowing that the company cannot sustain future growth on justcereal alone though, bringing on more options in the area of snack foods (especially those thatare convenient and easy to eat) will surely pay off over the long term for the company and itsinvestors.


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