There is no surprise in the fact that the preferences of people are changing with respect to healthy eating (especially teenagers and adolescents). Due to this change in health consciousness, the demand for tried and tested healthy foods and snacks has boomed and one manufacturer of such items, Kellogg(K), has been providing such products for over 100 years now, with no sign of slowing down. Let us see if the bright prospects for the future and improving lifestyle of people can contribute to growth of Kellogg.
What do past numbers say?
While sales of a company's products may tell one story, it's really the overall picture that potential investors should take into account. For Kellogg, this picture looks bright for a couple of reasons. Firstly, the company posted significant increases in gross and operating profit margin, very strong for both the food industry and the market as a whole.
Secondly, 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 pay-out 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.
- Warning! GuruFocus has detected 6 Warning Signs with K. Click here to check it out.
- K 15-Year Financial Data
- The intrinsic value of K
- Peter Lynch Chart of K
Competition in the industry
There is no doubt in the fact that the food and beverage market has become quite competitive with not only the presence of global players but also local chains that affect the sales of global guys. One of Kellogg's toughest competitors in the industry is GeneralMills (NYSE:GIS). This company has been delivering some strong numbers of late, including a double-digit rise in net income. In addition, the firm's shares are trading at 18 times trailing earnings, meaning that General Mills may possess a higher rate of 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.
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.
While General Mills posts a big threat to the prospects of Kellogg, Nestle has also turned the corner into healthier, 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 in the front.
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 pay-out 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 pay-out 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 into other revenue-producing areas in order to increase profit potential, especially in the recently changing economy.
The final opinion
Overall, the strengths of Kellogg can be seen in a variety of different areas, including the company’s revenue growth, nice operational cash flow, rising profit margins, and a very solid performance of its share price. Besides the technical parameters, the most impressive thing about the company is its efforts in expanding its product portfolio by including snacks as well. Seemingly, this change in the attitude of people with respect to health and medical well-being is here to stay and by improving on its offerings, Kellogg stands a good chance to make it big in the foods industry.