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Kellogg's - Is Now the Time?
Posted by: USAStockValuation (IP Logged)
Date: February 1, 2012 10:38AM

Kellogg's (K) is a 100 year old American icon originating in Battle Creek, Michigan. It is the producer of breakfast cereal and a number of convenience foods and snacks, and sells to more than 180 countries around the world.

The company reports its 4th quarter and annual results tomorrow, so let's take a quick look at its numbers as they currently stand.

Recent Results

From 2001 to 2010 it has grown its EPS from $1.16 to $3.30 representing an annual compound return of 11%. Over that time Kellogg's has been burdened with heavy debt - currently its Net Debt to Equity ratio is at a dangerously high 239%. Due to an ongoing share repurchase program (the company has repurchased $4.3B worth of its own shares over the past 10 years), Shareholders' Equity has been kept low. So the high Net Debt to Equity ratio is derived from a low Shareholders' Equity base.

Interest expense is around 12.5% of operating income, which we view as too high. The company is a good, albeit inconsistent, generator of cash however with Free Cash Flow totaling $8.8B over the last few years versus total Net Earnings over the same period of $9.6B. This Free Cash Flow has allowed the company to service its (high) debts, pay dividends (the div yield is currently around 3.5%), and repurchase a significant volume of its own shares.

Over the past 10 years Kellogg's has grown its Dividend per Share from $1.01 in 2001 to $1.76 today, representing an annual compound increase of only around 5%. The payout ratio has averaged a sustainable 50% over that period.

Quality Rating


Kellogg's exhibits the Quality Score of a mature company in that its EPS growth and Return on Retained Earnings produce low scores. The Net Debt to Equity score is also low, though this needs to be viewed against perhaps an artificially low Shareholders Equity as mentioned above. Importantly, the company's profitability as measured by Normalized Return on Equity (NROE) is excellent.

Intrinsic Value


At the moment, the Intrinsic Value for 2012 is noted as "forecast" pending the release of the 2011 annual results expected tomorrow. Kellogg's consistently achieves an extraordinarily high Normalized Return on Equity which allows its Intrinsic Value to grow meaningfully over time

Note that the shareprice data was taken from the Yahoo Finance "Adj Close" column which accounts for splits and dividends. It is rare to find a company whose share-price so closely follows its Intrinsic Value. Only high profile companies who are closely followed by analysts and who pay generous dividends produce a graph like the above. It can be seen that like virtually all stocks, a great buy opportunity was on offer in early 2009. Now also appears to be a reasonable opportunity to buy a part ownership in Kellogg's.

Investment Grade Table


With a Margin of Safety of 12% and a Quality Rating of 56, Kellogg's resulting Investment Grade Score is 7 placing it at number 113 in the Investment Grade Table. It should be noted that a company like Kellogg's which is a high profile company closely monitored by analysts, and one who pays a healthy dividend, is never going to offer a huge Margin of Safety, so it would never reach the upper echelons of the Investment Grade Table. The upper echelons of the Investment Grade Table are typically filled with smaller cap stocks.


Kellogg's is a strong company with a relatively secure future and one who currently offers a dividend yield of 3.5%. Given its strong market share, economies of scale, brand loyalty, and conservative payout ratio, it is reasonable to believe that the dividend offered by Kellogg's will grow, albeit slowly, well into the future. Whether you are a Dividend Investor, Growth Investor, Value Investor, or any other type of long position investor, you should never pay too much for a share in a company, especially for a rather mature company such as Kellogg's. So it is important to note that right now a handy Margin of Safety is available. Both dividend investors and value investors will see a reasonable opportunity at current prices.

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