Kellogg: Attractive dividend; Moderately attractive risk/reward (NYSE:K)

juanmonino

Investment thesis

  • The Seeking Alpha Quant ranking places Kellogg (NYSE:K) 16th (out of 56) in the packaged food and meat industry and 59th (out of 188) in the consumer staples sector.
  • The HQC scorecard demonstrates that Kellogg is only moderately attractive in terms of risk and reward: Kellogg receives an overall score of 45 points out of 100 and it is only in terms of profitability that the company is considered very attractive. In the Economic Moat, Financial Strength, Valuation and Expected Return categories, it is rated as Moderately Attractive; in terms of growth, however, the company is considered very unattractive.
  • I rate Kellogg as a caveat: the company’s current valuation isn’t low enough to consider it a buy. Although Kellogg has strong profitability, its growth rate is not attractive enough at the current valuation.

Kellogg’s Competitive Advantages

In a previous analysis on Kellogg, I took a closer look at the company’s competitive advantages:

“Because of the high and relatively stable revenue that Kellogg generates year-over-year, the company is able to devote a substantial portion of its revenue to new product research and development as well as marketing. of its existing products. In 2021, Kellogg spent $134 million on research and development and $790 million on advertising. These expenditures make it harder for potential competitors to enter the already highly competitive consumer goods market.

Additionally, I mentioned that Kellogg managed to build a relatively strong brand image:

“Kellogg has successfully built brands and created a product distribution network over its more than 100 year history as a company. Additionally, they have been able to create economies of scale that help the company stand out from its competitors With Pringles, Kellogg has a strong consumer brand that the company acquired from Procter & Gamble (NYSE: PG) in 2012. Along with the Kellogg’s and Cheez-It brands, the company has a number of important brands in its product portfolio that consumers have known for decades.

Additionally, I explained why I think Kellogg stock could help reduce volatility in your investment portfolio:

“I believe that the competitive advantages listed above will enable Kellogg to continue to generate stable profits in the future. Due to the company’s proven ability to generate high profits even in difficult economic times, I suppose that Kellogg’s stock will continue to be less volatile than the broader stock market.”

Preview: Kellogg

Kellogg

Sector

Basic consumption

Industry

Packaged foods and meats

Market capitalization

$25.68 billion

Employees

31,000

Revenue [TTM]

$14.58 billion

Operating result

$1.98 billion

Turnover 3 years [CAGR]

1.92%

5-year turnover [CAGR]

2.68%

Gross margin

30.96%

EBIT margin

13.56%

Return on equity

35.29%

Free Cash Flow Yield

5.04%

Dividend yield [FWD]

3.13%

Dividend payout ratio

55.24%

Source: In search of Alpha

Kellogg’s assessment

Discounted cash flow [DCF]-Model

In terms of valuation, I used the DCF model to determine Kellogg’s intrinsic value. The method calculates an intrinsic value of $69.60 for the business. The current stock price is $75.59, resulting in a 7.90% decline for Kellogg.

Kellogg’s revenue growth [FWD] The rate is 3.15%. I made more conservative assumptions and for my DCF model I assumed a 2% revenue and EBIT growth rate for the business over the next 5 years. Also, I’m assuming a perpetual growth rate of 2%. Due to Kellogg’s weak growth outlook (which is underscored by a D- rating for growth according to the Seeking Alpha Factor ratings), I expect the company to grow slightly below the average growth rate of the US GDP by 3%. I used his current discount rate [WACC] of 6% and a tax rate of 24.1%. In addition, an EV/EBITDA multiple of 8.7x was used, which corresponds to the company’s last twelve months EV/EBITDA.

Based on the above, I calculated the following results:

Market value vs intrinsic value:

Market value

$75.59

Upside down

-7.90%

Intrinsic value

$69.60

Source: The author

Relative Valuation Models

P/E of Kellogg [FWD] Report

Kellogg’s P/E ratio is 19.56, 17.05% above its 5-year average (16.71), providing an additional indicator that the company is currently overvalued.

Kellogg according to research alpha factor ratings

According to Seeking Alpha’s factor ratings, Kellogg is rated C- in terms of valuation. For growth, the company earns a D- rating. In terms of profitability, Kellogg is rated B+. For Momentum, it gets an A and for Revisions, a B+.

Search for alpha factor ratings

Source: In search of Alpha

This rating, according to the Seeking Alpha Factor Grades, reinforces my belief that the company is currently not attractive enough both in terms of valuation and growth to receive my Buy rating.

Kellogg’s Seeking Alpha Quant Ranking

The Seeking Alpha Quant ranking places Kellogg 16th (out of 56) in the packaged food and meat industry, and 59th (out of 188) in the consumer staples sector.

In Search of the Alpha Quant Ranking

Source: In search of Alpha

Kellogg according to the Seeking Alpha Quant rating

According to the Seeking Alpha Quant Rating, Kellogg is classified as a retainer, which again underlines my own retainer rating for the company.

Looking for an Alpha Quant rating

Source: In search of Alpha

Kellogg according to alpha dividend research ratings

According to Seeking Alpha Dividend Grades, Kellogg is rated B+ for dividend safety and A- for dividend growth. For dividend yield, the company gets a B and an A+ for dividend consistency.

Looking for alpha dividend grades

Source: In search of Alpha

Kellogg’s strong results, according to Seeking Alpha Dividend Grades, demonstrate that although the company is not considered attractive in terms of valuation and growth, its stock could still be attractive to dividend income investors looking reduce the volatility of their investment portfolio. Kellogg’s Beta 60M of just 0.43 and Beta 24M of 0.28 confirm this theory.

The high quality business [HQC] Scorecard

“The HQC Dashboard aims to help investors identify companies that are attractive long-term investments in terms of risk and reward.” Here you can find a detailed description the operation of the HQC evaluation sheet.

Overview of HQC Scorecard Items

“In the chart below, you can find the individual items and weighting for each category in the HQC dashboard. A score between 0 and 5 is assigned (0 being the lowest score and 5 the highest) for each scorecard item. Additionally, you can see the conditions that must be met for each point of each scored item.”

HQC Dashboard

Source: The author

Kellogg according to HQC scorecard

Kellogg according to HQC scorecard

Source: The author

According to the HQC scorecard, Kellogg receives an overall score of 45 out of 100 points. In terms of risk and reward, this means that it can be classified as moderately attractive.

The HQC scorecard indicates that Kellogg is only rated very attractive in the Profitability category. In the Economic Moat, Financial Strength, Valuation and Expected Yield categories, the company is rated as moderately attractive. For innovation and growth, it has a very unattractive rating.

This moderately attractive overall rating in terms of risk and reward and Kellogg’s very unattractive rating in terms of Growth (highlighted by the results of the Seeking Alpha Factor Grades) reinforce my conviction to continue to rate the company as a hold.

Risk factors

In my previous analysis on Kellogg, I shared my thoughts on the most important risk factor regarding an investment in the company:

“I view strong and intense competition in the consumer goods industry as one of the main risks for Kellogg. The business faces strong competition from competitors like PepsiCo (PEP), which are growing faster than Kellogg. At the same time, competitors such as PepsiCo, Nestle (OTCPK:NSRGY) and Danone (OTCQX:DANOY) have been able to establish even stronger brand images than Kellogg.For example, PepsiCo is ranked 36 on the Forbes list of the most valuable brands in the world. Additionally, PepsiCo even has ranked sub-brands on the list, such as Frito Lay. Nestlé is ranked 54th and Danone 82nd. Kellogg, however, does not appear in the ranking of the 100 most valuable brands in the world.”

At the same time, I explained why I think a high inflation environment could also be a problem for Kellogg:

“In times of high inflation like today, companies with the strongest brand images are the most likely to be able to pass on to consumers the increased costs they have in the manufacturing process of their products. That’s why I think a company like Kellogg, which doesn’t have such a strong brand image compared to some of its competitors, might be more likely to suffer from high inflation. So they might not be able to pass on higher prices to consumers to the extent PepsiCo can, potentially leading to lower profitability for the company in the future.”

These risk factors also contribute to the fact that I currently view Kellogg as a reserve.

The essential

In this analysis, I used different evaluation methods that contributed to my overall conclusion: a holding score for Kellogg.

The DCF model shows that Kellogg is currently slightly overvalued posting a decline of 7.9%. Relative valuation models (such as the P/E ratio) further demonstrate that the company is currently slightly overvalued: with a P/E ratio of 19.56, or 17.05% above its 5 last years (16.71).

The results of the Seeking Alpha Factor Grades in terms of evaluation (C- grade) and growth (D- grade) reinforce my decision to rate Kellogg as a safe bet. Kellogg’s only moderately attractive rating in terms of risk and reward, according to the HQC scorecard, underscores my own rating once again. The company’s very unattractive rating in terms of Growth also plays a major role in consolidating my opinion.

From my perspective, Kellogg stock is currently only attractive to dividend income investors looking for a stock that helps reduce volatility in their investment portfolio. Proof of this is Kellogg’s low 60M beta of just 0.43 and the company’s 24M beta of just 0.28. For all other investors, I would recommend waiting until the stock valuation is lower before investing in the company.

Author’s note:

Thank you very much for reading! If you have any questions regarding this analysis, feel free to leave a comment below! II am happy to discuss your thoughts on Kellogg.

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