Portfolio Update
The FiveTwenty portfolio received $12.18 in dividends in the past week. PG paid its quarterly dividend during the week.
| Past Week Dividend | $12.18 |
| Current Quarter Dividend (Q2 2021) | $112.67 |
| LifeTime Dividend | $225.71 |
| Estimated Annual Dividend | $1,625.01 |
The capital allocation for the week of 05/23/2021 to 05/29/2021 will be used to establish a position in Kellogg Co. (NYSE: K)
K – Company Profile
Kellogg Co (K) manufactures and markets ready-to-eat cereal and convenience foods. The company operates through four segments: North America; Europe; Latin America; and Asia Middle East Africa. Some of the company’s best known brands are: Pringles, Cheez-It, Special K, Kellogg’s Frosted Flakes, Pop-Tarts, Kellogg’s Corn Flakes, Eggo, Kashi, RXBAR, and more. Official Site | Wikipedia
| Dividend Streak | 18 years |
| Yield | 3.43% |
| Payout Ratio | 55.34%* (GAAP 62.87%) |
| P/E | 16.14* (GAAP 18.02) |
* computed using TTM adjusted EPS of $4.12 as of Q1 2021
Financials
Does K have the financial means to sustain and raise its dividend going forward?
Over the last decade, K’s revenues have seen very little overall growth. Revenues topped out at $14.8 billion in 2013 followed by a decline to $12.9 billion by 2017, and ended up at $13.8 billion in FY 2020. Net income has seen similar trends. However, the return to more consistent top line growth K experienced over the last 3 years are encouraging to see.
In the last 10 years, GAAP EPS for K have shown similar volatility and stagnation as GAAP net earnings. On the other hand, adjusted EPS showed a more consistent growth trend. The $3.31 adjusted EPS in 2012 grew to $3.99 by 2020. A 2.1% CAGR rate over the 9 years.
The average dividend per share growth rate was 3.90% per year in the past 10 years and 2.50% per year in the past 3 years. (per GuruFocus) The payout ratio as a percentage of adjusted earnings has stayed between a low of 47% and a high of 57%.
K in 2020 and beyond
For FY 2020 K saw a 1.4% increase in net sales over the prior year. Strong organic net sales growth of about 6.0% compared to FY 2019 were offset by the revenue loss from divestitures in July 2019 and unfavorable foreign currency. As for COVID-19, while the pandemic increased operating cost for the company it also resulted in increased demand for the K’s products.
K started FY 2021 with a strong Q1. Revenue grew 5.1% and adjusted EPS grew 12.1% compare to Q1 of FY 2020. The company experienced robust growth in Latin America (+10%) and AMEA (+14%) (Asia Pacific, Middle East and Africa) regions. Furthermore, K revised its full year guidance upwards during the earnings report. Revenue is expect to be flat compared to previous guidance of a 1% decline. Adjusted EPS are expected to increase 1%-2% compared previous guidance of a 1% increase.
Valuation
Are we paying too much for K at the current share price?
In the last 10 years, K’s P/E ratio (base on GAAP earnings) saw a low of 11.65 and a high of 69.61, with a median value of 18.67. (per GuruFocus) Currently, the shares trade at a P/E ratio of 18.02 on GAAP and 16.14 on adjusted TTM earnings.
The current share price of $66.50 is 4.4% above the 50-day moving average and 5.0% above the 200-day moving average. Additionally, the share price is near the 60th percentile of the 52 week trading range.
Following its latest earnings report on 5/6/2021, K share price has seen a small jump. However, we believe the share price still offers a reasonable entry point into K.
Yield
How does the current dividend yield for K compare to historical values?
In the last 10 years, the dividend yield for K has been in a range of 2.33% to 4.22%, with a median of 3.05%. (per GuruFocus) The current TTM yield of 3.43% is significantly above the historical median.
Furthermore, on 4/30/2021 the company raised its quarterly dividend to $0.58 from $0.57, making it the 18th consecutive year of dividend increases for the company. The raise represents a 2% increase in the dividend.
Thesis
Why are we adding K to the FiveTwenty portfolio?
K has a strong stable of consumer brands. It has completed a number of portfolio realignment and cost cutting initiatives and seems poised to resume organic top line growth. Additionally, the shares price offers an attractive dividend yield and valuation.
Additional Research
Photo by Sten Ritterfeld on Unsplash
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