Kellogg’s Company (K), the iconic cereal, breakfast food and snacks company, reported Q2 2019 results and reported 2.3% higher organic earnings and 3.0% increase in net sales despite currency headwinds. The company exhibited organic growth in every geographic region after a difficult 2017 and 2018. The stock price increased almost 10% in response. The company has been restructuring and investing in its brands. In addition, the company is divesting non-core brands and plans to use it for debt reduction. Long-term debt is fairly high for a company of this size at $8,183M giving a debt-to-equity ratio of 3.36 greater than my criteria of 2.0. Kellogg raised the annual dividend by 1.8% to $2.28 per share from $2.24 per share. This represents the 14thstraight increase. But the 10-year growth rate is only about 5.5%. The current dividend yield is ~3.6% well above the S&P 500’s average and also my criteria of 3.0%. The payout ratio is ~59% a little on the high side but still below my threshold of 65%. However, Kellogg’s has struggled with consistent top line and bottom line growth over the past 10-years. From the perspective of valuation, the company is trading at a forward P/E of ~16.3 based on expected 2019 EPS of $3.89. The average P/E ratio during the past 10-years is about 16.6 so the stock is about fairly valued at the current P/E multiple.
J. M. Smucker (SJM) is a jam and peanut butter, coffee and pet food company. J. M. Smucker owns numerous iconic brands including Smuckers, Jif, Folgers, Crisco, Milk-Bone, Meow Mix, and Kibbles ‘n Bits. Most of the company’s sales are domestic. J. M. Smucker recently raised its annual dividend by ~3.5% to $3.52 per share from $3.40 per share. This is the 17thstraight increase. The 10-year dividend growth rate is about 10%. The current payout ratio is relatively low at ~43% and well below my threshold criteria of 65%. J.M. Smuckers’ dividend yield is about ~3.2% well above the S&P 500’s average and my criteria of 3%. Smuckers has grown the top line from $4.61B in FY2010 to $7.84B in FY2019. This has come mostly through acquisitions. Organic growth has been more difficult to come by in the company’s competitive market segments. The current P/E ratio (FWD) is 13.2 based on expected 2019 EPS of $3.52. This is well below the 10-year average of 17.2 and the S&P 500’s average of 22.0. I believe that the stock is undervalued at the current P/E multiple and worthy of further investigation.
The Hershey Company (HSY) is a seller of chocolate and candy. The company controls about 45% of the U.S. chocolate market but sells globally. Its brands are well known to customers and include Hershey, Reeses, Kisses and others. Note that the company is controlled by the Milton Hershey School Trust which has 80% of voting power and 32% of share ownership. Hershey raised its dividend 7% to $3.092 per share from $2.888 per share. This the 10thstraight increase and the dividend growth rate has been 8.8% during that time. The current dividend yield is only about 2% and is well below my desired threshold of 3%. The dividend is well covered by EPS with a payout ratio of ~54%. Hershey has consistently grown the top and bottom lines since 2009. Revenue has increased from $5.3B in 2009 to $7.79B in 2018 and simultaneously diluted EPS has increased from $1.90 to $5.58 in the same time period. This provides confidence that the divided will grow with time. The stock is trading at a P/E ratio of ~26.4 (FWD) based on estimated 2019 EPS of $5.76. This is higher than the S&P 500’s average of 22.0 and the 10-year average of 21.2. At the stock price and P/E multiple I view Hershey as overvalued.