Mondelez International (MDLZ, Financial) is one of the largest snack companies in the world with net revenue of $25.9 billion in 2016. The company is spread across 165 countries and operates five product segments: Biscuits, Chocolate, Gum & Candy, Beverages and Cheese & Grocery. The combination of highly defensive products and global operations does make Mondelez an attractive dividend investment, but how safe are its dividends in the current market scenario?
Consumer goods giants are facing a troublesome road ahead. The global economy is not growing fast enough to bail them out while competition and, often, their own size act as counterweights to revenue growth. Procter & Gamble (PG, Financial), Unilever (UN, Financial), Colgate-Palmolive (CL, Financial), Mondelez and many more companies operating in what was always considered a defensive sector have watched their revenues decline over the past several years.
Economies around the world are doing reasonably well, but there is no catalyst that is going to make things move faster. According to the IMF, world output grew at a little more than 3% in the last two years, and the Fund expects the current growth rate to continue for the next two years as well. Once again, reasonable growth but not something that is going to help the top lines of consumer goods manufacturers. The high level of competition only makes it harder to increase prices without risking volume declines.
Mondelez’s revenues declined from $35 billion in 2015 to $25.9 billion in 2016. The sale of its coffee business in 2015 was one of the major reasons behind the sharp decline in revenues, but the real problem is that organic revenues have turned negative this year. The company posted a 2.7% decline during the second quarter and a 1% decline in the first six months of the current fiscal.
In 2016, the Biscuits and Chocolates business units accounted for more than half of the company’s revenues while the North America segment accounted for 21.6% of net revenues. Consumer preferences in the North American market have gone through a huge change in the last several years, and the current generation has become extremely health conscious. Athleisure product companies have seen their revenues soar while soda consumption is at a 30-year low, and burger chains continue to struggle to keep customers walking in through their doors.
Mondelez is not oblivious to this change, of course, and the company is working toward changing its product portfolio and making it more acceptable to the current generation. In its 2016 annual report the company wrote:
“Prolonged negative perceptions concerning the health, environmental and social implications of certain food products and ingredients could influence consumer preferences and acceptance of some of our products and marketing programs. For example, consumers have increasingly focused on health and wellness, including weight management and reducing sodium and added sugar consumption.”
But that shift is going to be a long process, and Mondelez needs at least a few more years to readjust its product lineup. Coca-Cola (KO, Financial) and PepsiCo (PEP, Financial) are already moving in that direction, but even for them the results are yet to filter down to the bottom line.
The question of dividends and dividend growth
With revenue growth prospects remaining tight during the short to medium term due to market conditions, dividend growth will be entirely dependent on the company's balance sheet strength. At the end of the second quarter, Mondelez had $1.39 billion cash against $13.2 billion in long-term debt. The company paid $124 million toward net interest expense during the quarter while operating income was $641 million.
In the first six months of the current fiscal, total dividends paid was $581 million, which is 39.2% of operating income and 51% of net income. There is enough strength in the balance sheet to keep the dividends flowing, but dividend growth will speed up only after revenues start growing, which might take at least a few more years.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
