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Food stocks are very popular with dividend investors. After all, there is always something to eat and drink and many food companies are reliable dividend payers. However, growth in sales or cash flow often declines the larger companies become.
In order to avoid this inertia, the American food company Kellogg recently split into two companies, Kellanova (ISIN US4878361082) and WK Kellogg (|SIN US92942W1071).
In this share analysis, we want to take a closer look at the new and old Kellogg, which is now called Kellanova . The following questions will be answered:
The most important facts in brief
Around a year ago, the management of the former Kellogg Group decided to spin off part of its business. As a result, there are now two companies: WK Kellogg, which includes the entire cereals business in North America, and Kellanova, which includes the cereals business outside North America and the global snacks business as well as ready meals.
Let's take a look at Kellanova 's product offering. It includes many well-known brands that have been around for decades.
Kellanova offers snacks, ready meals, frozen meals (waffles and vegetarian burgers) and cereals. The snacks division accounts for around 60 percent of sales (2022). The Pringles stacked potato chips are particularly well known in Germany. Crackers, rice and marshmallow bars and sweets are also offered. The breakfast cereals Frosties or Froot Loops are also likely to have been seen by many in supermarkets in Germany. This segment accounts for around 20 percent of sales. Kellanova achieves around 10 percent each with frozen food and ready meals.
The bottom line: the product range is broadly diversified, with a clear focus on snacks, which account for more than half of sales.
Following the spin-off of WK Kellogg, Kellanova has realigned its focus and is now concentrating on growing its global snack business and expanding its products in emerging markets.
Why this expansion strategy?
Because it already accounts for over 80 percent of Kellanova's total turnover. It therefore makes sense to further strengthen the focus in this direction.
When implementing this strategy, familiar implementation concepts come to the fore.
Kellanova wants to continue to distribute its products via the retail trade. With the support of data analysis, demand is to be appropriately supported. In the long term, Kellanova wants to improve its margins and build up economies of scale in the emerging markets.
Kellanova has set itself ambitious long-term targets. Sales are to be increased by 3-5 percent annually. EBIT is to grow by 5-7% per year and earnings per share (EPS) by 7-9%.
At the same time, 50 percent of net profit is to be paid out as a dividend.
Why ambitious? Large food companies such as Nestlé and Kraft Heinz have seen lower sales growth in recent years compared to the inflation rates reported worldwide.
Confectionery manufacturers The Hershey and Mondelez, on the other hand, have performed better.
The future will show in which category Kellanova will find itself.
Kellanova has set itself ambitious goals for its long-term strategy.The range is diversified both in terms of total sales and geographical distribution.However, the focus is clearly on the snacks segment with the flagship Pringles.
The recently reported quarterly figures tell us whether Kellanova has already been able to achieve its goals in the short term.
The recently reported Kellanova quarterly figures are not yet directly comparable with the previous year, as the company was still operating as the Kellogg Group in Q1 2023.
But let's go through the income statement one by one and note a few positive developments.
Sales fell by 21 percent year-on-year to 3.2 billion dollars.However, as direct costs were reduced by 23%, gross profit remained at around 1.5 billion dollars, which was around 17% less than in the previous year.
In short: Kellanova is at least currently in a position to pass on its increased raw material and production costs to consumers.
EBIT fell by 25 percent to 402 million dollars, leaving a net profit of 267 million dollars.This figure is only 10 percent down on the previous year.
To understand these quarterly figures a little better, let's take a look at a slide from the analysts' presentation.
We see that Kellanova can report organic sales growth of 5.4%.This corresponds to the upper end of management's long-term strategy (3-5% p.a.).
However, sales volumes fell by 3.8%.On the other hand, prices were increased by 8.5% and a decline in sales of 4.3% was reported due to currency effects, which had an almost 9% negative impact on sales growth.
It is not easy to classify Kellanova's quarterly figures due to the lack of precise comparisons, but it can currently be seen that Kellanova is passing on increased costs to consumers.
However, this possibility is not always given, so that an increase in sales volumes would have to be achieved again in an environment of low interest rates in the near future.
Kellanova has also focused on the emerging markets, where currency fluctuations are always to be expected.The negative currency effects thus reported could be a recurring theme in the quarterly reports and should be taken into account by investors.
Following the spin-off of the North American cereals business, analysts are somewhat cautious with their forecasts for the current year.
In the first full financial year after the spin-off, analysts expect sales of USD 12.68 billion, which would correspond to a slight decline of 3.4% if the forecasts are accurate.
However, significant improvements in margins are expected.The EBITDA margin is expected to improve to an average of 17.68% and the net margin to over 9%.
Based on the current figures, this trend cannot yet be fully recognized.
Analysts are currently still slightly off the mark with their margin forecasts, as the EBITDA margin is only 15%.However, the net margin has already risen to 8%.
Conclusion: Analysts' estimates should always be viewed with caution, but at least in terms of the net margin, the result is not far off the analysts' forecasts.
Like many food manufacturers, Kellanova, as a large part of the former Kellogg Group, has a long dividend history.Part of the profits have been returned to shareholders since 1989.Kellanova is currently valued at 12 points according to the dividend strategy.
These 12 points are enough for a place among the dividend top scorers according to the dividend strategy.
How did Kellanova achieve this score?
The share receives two points for the current dividend yield of 3.7 percent.A further three points are awarded for the average dividend yield of 3.3 percent over the last 10 years.
Kellanova also scores three points for the payout ratio, which is around 67%.The share also scores three points for the continuity of dividends, as these have not been reduced in the last 10 years.
The twelfth point is awarded for the average annual growth of the dividend over the last five years (CAGR).Here the share disappoints with just 1.5 percent.Kellanova distributes the dividend every quarter.The paydays are in March, June, September and December.
The share could fit into a food dividend calendar in which investors receive dividends every month.
The stocks shown in the calendar are PepsiCo, Mondelez, General Mills, The Hershey and Kellanova.
By the way: You can create this unique dividend calendar yourself if you:
Why this selection?
Because they are all more or less in direct competition with Kellanova.There are overlaps with each company.More on this in a moment.
We now come to the valuation of the Kellanova share.Here, too, caution is required, as comparisons with previous years are distorted due to the split last fall.
One possibility would be to value the share on the basis of its price/earnings ratio.As a direct comparison with the previous year is not possible, we look at the forecast earnings per share (EPS) in the current financial year.
On average, analysts expect earnings per share of 3.44 dollars.
At a current price of around 62 dollars per share, this corresponds to a P/E ratio of 18.
This is no bargain for a company that is still undergoing a bit of a transformation and is not expecting any major increases in sales or EPS.
Let's try the enterprise value/free cash flow ratio (EV/FCF).
The current enterprise value is 27.63 billion dollars.
Management's guidance for free cash flow (FCF) is around USD 1 bn.Accordingly, this would be an EV/FCF ratio of 27.63!This is a high figure for the reasons already mentioned.
But these figures are not very meaningful unless you compare them with some of the competition to get a better overall picture.
So now let's take a look at Kellanova stock compared to the other food stocks in the dividend calendar.
Each stock competes with Kellanova to some extent.
With a current P/E ratio of 23, Kellanova is ahead of Hershey or Mondelez and even well ahead of General Mills, which only has a value of 16.Only PepsiCo is ahead of Kellanova with an earnings multiple of 27.
In terms of EV/FCF, Kellanova's share is somewhat better off.With a current EV/FCF of 25, the share only comes off worse in comparison with General Mills, which has a value of 22.The other three shares each have a value of around 30 or more.
Let's add the margins and sales growth to get a better picture of the valuations.
PepsiCo has the highest gross margin.It stands at 54 percent.Hershey and Mondelez also have high gross margins, both at around 44 percent.These two companies also have free cash flow margins of over 10 percent and, in the case of Mondelez, sales growth of almost 10 percent.
AlthoughGeneral Mills only has a gross margin of 34% (like Kellanova), it has the highest free cash flow margin.It is almost 12 percent.Kellanova only achieves 7 percent, as does PepsiCo.
Now that we have looked at a few other parameters, it has to be said that Kellanova 's shares are currently not up to the competition.
General Mills shares are valued more favorably than Kellanova and have the highest free cash flow margin of all the stocks compared.
In terms of overall quality, snack suppliers Hershey and Mondelez are the best performers:
Overall, the Kellanova share is not worth buying.
After the analysis carried out, investors probably cannot expect much more from the Kellanova share than before the spin-off from WK Kellogg.
The company should certainly be able to achieve its long-term goals.However, there is also a certain currency risk in the emerging markets, a certain dependence on the success of individual brands, e.g. Pringles, and strong competition, such as the companies compared with Kellanova.
Analysts are similarly skeptical, with a clear majority rating the share a Hold.
Of 21 analysts, 86% (18 analysts) currently only recommend holding the share.3 analysts currently consider the share worth buying.No analyst votes for a sell.
The average price target is only one percent above the current price target of almost 62 dollars.
The motto “stay cool and collect dividends” may therefore apply to investors who have already bought in, as Kellanova's cash flows should continue to be sufficient to pay a dividend and this could continue to be increased by low percentage points.
At the current level, however, the share is not an obvious entry point, but this could change at a price level of around 40 dollars.The P/E ratio would then be below 12 and the share could be re-analyzed.
For this reason, it could make sense for interested investors to set up a price alert at 40 dollars or a P/E alert at 12.