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Why Kellogg Could Be Top Packaged Food Stock

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Mohamed Ahmed Soliman | Dreamstime.com

By Wednesday, 20 March 2019 02:57 PM Current | Bio | Archive

The packaged food industry is experiencing a number of broad challenges. A few of the various headwinds affecting the industry include rising cost inflation, pressure from retailers to lower prices, and sluggish sales growth due to competition from natural and organic foods.

Because of this, many stocks in the packaged food industry have underperformed the S&P 500 Index over the past year. But now might be the right time for investors to consider high-quality packaged food stocks, as the strongest operators still possess strong brands and steady profits.

For example, Kellogg Co. (K) shares have declined 18% in the past year. But the company is still highly profitable, with a low stock valuation and a high 4.1% dividend yield. This might make Kellogg the top stock in the packaged food industry today.

Snack On Profits And Dividends

To be sure, the challenges facing the packaged foods industry are very real. Consumers are gradually shying away from the “center aisles” of the grocery store, avoiding shelf-stable products in favor of fresher alternatives and organic food. And while certain categories like cereal are declining, Kellogg has broadened its portfolio to include new categories that are still growing.

To that end, although Kellogg has its roots in cereal, it has invested in snacks like Cheez-It, Keebler, Pringles, Carr’s, and Famous Amos. The result of these investments is that Kellogg’s snacks portfolio now represents a larger percentage of domestic sales than cereal.

Kellogg’s reshaped portfolio has positioned the company to return to growth. After Kellogg’s organic net sales declined for four years in a row from 2014-2017, organic sales were flat in 2018. Kellogg expects organic sales to return to growth in 2019, with projections for a 1%-2% increase. Not surprisingly, snacks are leading the way. Sales grew 7% for Pringles, 15% for Rice Krispies Treats, and 5% for Cheez-It last year. Snacks remain a growth category, and Kellogg is optimally positioned to capitalize on the consumer trend toward snacking.

In addition to snacks, Kellogg is making a meaningful push into protein bars with the RXBAR acquisition. RXBAR was the primary reason for Kellogg’s 5% sales growth reported in the most recent quarter. RXBAR posted impressive retail sales growth of 180% in 2018.

Kellogg expects adjusted EPS to decline 5%-7% in 2019, as the benefit of tax reform laps. However, positive organic sales growth indicates strong demand for the company’s products. And, while the expected EPS decline is discouraging, Kellogg had a strong year in 2018 with 8% adjusted EPS growth.

Moreover, Kellogg will still be highly profitable, with adjusted EPS of $4.32 last year. Assuming a 5%-7% decline leads to expected EPS of $3.97-$4.06 for 2019. This should still cover the company’s dividend, currently at $2.24 per share.

With a 4.1% dividend yield and accelerating sales momentum, Kellogg could be the top packaged food stock for income investors.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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With a 4.1% dividend yield and accelerating sales momentum, Kellogg could be the top packaged food stock for income investors.
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Wednesday, 20 March 2019 02:57 PM
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