Challenging Kellogg the breakfast giant

There are a couple of businesses that play a role in literally everyone’s life. For instance, each day I use Microsoft software at work, use my i-phone and i-pad from Apple to communicate with my friends, I “google” and write e-mails with Gmail, my family members shop via Amazon and we all love to connect and socialize, using Facebook, Instagram, Messenger or Whats-App.

One of these companies that is present in our daily lives certainly is the Kellogg Company with its broad range of breakfast products. Kellogg’s Corn Flakes belong to one of the world’s best-known brands, served daily on millions of breakfast tables and that’s for more than 100 years.

Company History of the Kellogg Company

The history of the business goes back to 1876 when the two brothers John Harvey and William Keith Kellogg worked at a sanatorium. John Harvey was superintendent and his brother William Keith Kellogg’s bookkeeper. Amongst others, the two brothers made researches to improve the vegetarian diet of the sanitarium’s patients, especially in the wheat-based granola. It was rather by random the two invented the popular and world-famous Corn Flakes. They were cooking wheat. The two brothers put the tempered grain through the rollers and interestingly, each wheat berry came out as a flattened, thin flake. The Corn Flakes were born.

The product became instantly popular not only among patients of the sanatorium. But it also immediately became clear, that just one of the two brothers had an entrepreneurial spirit, fully recognizing the huge potential of the product.

In 1906, William Keith Kellogg founded the Battle Creek Toasted Corn Flake Company after having convinced his brother to relinquish rights to the product. It was in 1922, that W.K. Kellog re-named the company to the today’s known Kellogg Company. After decades of mainly organic growth, from 1969 on, the Kellogg Company has been broadening its product range and focused on a diversification strategy through several acquisitions. In 2012 the Kellogg Company made its largest and most important acquisition by buying potato chips brand Pringles from Procter & Gamble which made Kellogg the world’s second-largest snack food company after PepsiCo.

The Kellogg Company’s Mission Statement “Nourishing families so they can flourish and thrive” got a more clear competitive edge: “Win in Breakfast; be a Global Snacks Powerhouse”.

Business Overview on the Kellogg Company

The company is the undisputed number one in cereal breakfast. But PepsiCo’s Quaker Oats and products of General Mills and Nestlé are following suit. The Kellogg Company is also the world’s second-largest snack player with its flagship product Pringles and other products such as crackers (Cheeze-It) and frozen waffles (Eggo).

The Kellogg Company is a large packed food company with an enviable brand portfolio and an amazing global footprint. The business has been paying out dividends since 1925 but here’s the catch: the Kellog Company is not a dividend aristocrat which means it does not play in the exquisite league of prestigious companies such as The Coca Cola Company, PepsiCo, or Hershey which have managed to increase their payouts for more than 25 years.

So, the Kellogg Company, while showing inherently robust business performance, has not been successful in achieving consistent growth to the top and bottom line. Consequently, there were time periods when the dividend did not grow at all. It was just in 2005 when the business resumed an increasing dividend policy. In contrast for instance, with The Coca Cola Company, we are talking about 58 years of climbing dividends.

Kellogg shows a diversified product range

The business makes cereal and convenience foods, including crackers and waffles, etc.

The original Corn Flakes -the breakfast cereal made from toasting flakes of corn- are still very popular for hundreds of millions of breakfast servings every day.

Just in any supermarket around the globe, you can see a picture like this on the shelves.

The Frosted Flakes or Frosties are a breakfast cereal as well but consisting of sugar-coated corn flakes. These Sugar Frosted Flakes were introduced in 1952 by the company. As we all know, the original Corn Flakes contain already significant amounts of sugar, and the Frosted Flakes – when consumed daily – are of course even less healthy.

As said, the Kellog Company is the second-largest snack producer with its very popular products Pringles and Cheeze-It and waffle products such as Eggo.

The company’s Strengths and Challenges

After some years of sluggish growth, the Kellogg Company shows more robust top-line growth and profit margin expansion which is due to a continued focus on initiatives to sustain incremental growth moving forward. What’s certainly welcome is that the company is adapting to consumer trends and tries to focus on less sugary products and healthier food servings.

Let’s not forget, the Kellogg Company is facing some strong headwinds. The ready-to-eat category is in decline on a global scale, consumers are turning to other breakfast options and the trend leads to less sugary products. Particularly interesting is the company’s venture in giving their products a more healthy image (“protein flakes”) and their cooperations with other companies, in particular in the area of fitness.

The Kellogg Company has also taken a strong focus on e-commerce and continues setting its priority at marketing, further strengthening and diversifying its distribution channels. The Kellogg Company also uses its marketing expertise to diversifying its packaging presence.

The company shows a relatively high financial leverage, a Baa2 Moody rating which does contrast with a much stronger credit rating of PepsiCo for instance with an A1 Moody rating. But on the positive side, we have a business with iconic brands and stable operating performance in its core business. What’s certainly also a positive aspect is its growing snack business, led by the Pringles brand.

Thoughts on the Kellogg Company stock

As Value Investor Benjamin Growth rightly stated, the stock market is a popularity contest in the short and medium-term and a weighing machine over the long run.

The Kellogg Company has shown at least stable operating performance and over the long term, the business grew top-and bottom-line annually by a low single-digit rate. The market clearly has been taking into account the iconic brands and enviable global footprint of the company, reflected in an upward stock price trend. It has been a bumpy road here and there, but eventually, the stock price has been up, pretty in line with the business fundamentals.

But still, if one invested in 2011 at a price of roughly USD 50 per Kellogg Company share and 10 years later the stock is trading in a range of USD 70 and 80, you can immediately see, that there are certainly more interesting alternatives.

Just looking at the share chart of PepsiCo for instance, we can see a more broadly diversified, more robust, and dynamic company that is clearly outperforming the Kellogg Company.

With PepsiCo, investors have more than doubled their money over the last 10 years in terms of book gains and have seen much stronger dividend growth.

What we can also see with the Kellogg Company stock is a relatively high valuation. For decades the stock traded at 16 x earnings, yielding over 3 %.

Currently, the stock is trading at a PE-Ratio of almost 20 x at a stock price of roughly 70. The dividend yield is significantly below 3 %.

Paying 20 x for a large, non-cyclical business with slow growth can be a tricky one, as the future growth prospects are not necessarily high enough to warrant such a multiple.

Personally, I would currently consider more attractive options. For instance, PepsiCo trades above 20 x and has stronger growth potential, better earnings quality, and shows stronger business fundamentals (A1 Moody’s rating, etc.).

But of course, the beauty of the stock market is the fact that it provides us with a market price that changes over time. As long-term-oriented investors, we can put strong businesses such as the Kellog Company on a watchlist and wait until we see a price that we are comfortable with.

Disclaimer
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

About Savy Fox

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2 comments

  1. Great analysis and break down on the History SavyFox ! 👌😃
    I have once in a while cereals 🥣 for the breakfast. Indeed Kellogg is in everyone’s life everyday! It’s a giant with a market cap. of 21 billions. Like, you I will choose into this field PEP for snacks investing, better growth potential in the future. Keep up the good work my fellow investor friend ! 💰📈🙏😃

    • Hi Dividendes & FNB
      Appreciate you swinging by and commenting!
      Yes, Kellogg is an incredibly interesting company, but PEP is clearly the even better business. Glad to have you as fellow shareholder in that wonderful company.
      All the best and happy investing!
      Cheers

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