The other night I settled in to watch a little college football, and while I wasn’t expecting an overly entertaining game, the battle between TCU and Cal proved to be exciting and the game was decided in overtime.
You might be asking how that is relevant to my latest purchase.
Whether it is a coincidence or not, the bowl game that TCU and Cal were playing in happened to be the Cheez-It Bowl.
Or as one of the $500+ million dollar brands in the Kellogg portfolio tweeted, the Cheez-I(N)t Bowl due to the number of interceptions that were made by each team.
With the market volatility we have been experiencing, as well as the year nearing to a close, I have been focused on adding to some of my underweight positions to start the new year strong and I’ve had my eye on Kellogg.
Brief Background on Kellogg Company
Kellogg Company is the world’s leading producer of cereal and toaster pastries and the second largest manufacturer of cookies and crackers. Their portfolio also includes products such as savory snacks, fruit-flavored snacks, and frozen waffles and vegetables.
I would be willing to bet that many reading this post have at least one Kellogg product in their kitchen with many of their core brands being household names, including: Pringles, Special K, the aforementioned Cheez-It, Keebler, Eggo, Raisin Bran, and Froot Loops, to name a few.
Kellogg primarily sells their products to large retailers, including a number of companies that are well-known in the DGI community such as Target, Walmart, and Kroger.
It is interesting to note that in 2017, Kellogg announced a major change to their distribution strategy. In the past, they operated a direct-to-store model, which means they had the operational cost of shipping product to each retailer. They are now moving towards warehouse deliveries where the retailer owns the responsibility–and cost–of transporting the product to their stores. Kellogg’s management expects this change to result in a cost savings of approximately $650 million by 2019.
Kellogg’s has a stable of strong brands and has demonstrated an ability to shift their business model to match consumer tastes, which is good because they are working on this now as consumers are moving more towards healthier foods.
Despite taking on debt to acquire a number of companies in recent years, Kellogg’s maintains a BBB credit rating from Standard & Poor’s and has benefited from relatively low borrowing costs.
However, that debt could weigh on their ability to grow and increase the dividend.
In addition, while they are attempting to shift to healthier foods and snacks, their core business does remain the ready-to-eat cereal and growth forecasts in that space are quite conservative in the coming years.
Kellogg Company was founded in 1906, and is headquartered in Battle Creek, Michigan.
Kellogg By the Numbers
Kellogg was on my dividend watch list in October and November, but I was not able to add to my position. With the recent decline in price, along with the rest of the market, I was able to secure a price and dividend yield that made me happy to add to my position.
Speaking of the dividend, Kellogg has paid an uninterrupted dividend since 1925 and has a 15-year run of consecutive dividend raises.
Checking in with Simply Safe Dividends, we see that Kellogg currently has a dividend safety score of 76 and this puts it safely above the threshold that I like to see.
Using the SSD dividend safety score as a reference, I like the majority of my holdings to be in their “Safe” to “Very Safe” range as companies with those ratings have a very strong track record of avoiding a dividend cut.
The next step was to examine the 5-year average dividend yield and P/E ratio.
Based on my current purchase, Kellogg is trading approximately 33% above their 5-year average dividend yield while their forward P/E ratio of 13.5 is considerably lower than their average P/E ratio of 17.1 as well as the sector P/E average.
Both of these factors indicate that Kellogg may be undervalued right now.
Taking that information and cross-referencing with FAST Graphs, as shown above, we see that Kellogg has dropped down below their normalized P/E ratio. This also signals that they may be undervalued.
Lastly, I took a look at their dividend growth and while it has not been stellar, they have been quite consistent with raises in the neighborhood of 4.0% for quite a few years.
Adding to Kellogg Position
When I originally added Kellogg to my dividend watch list in October, I mentioned that I was looking to start nibbling if the price dropped down around $65.00/share.
Fortunately, by focusing my purchases elsewhere over the last couple of months, I was now able to secure a much better price and doubled the small position that I already had.
Here is a recap of my purchase:
I purchased 15 shares @ $55.95/share that will add an additional $33.60 in projected annual dividend income.
Overall, this increases my position in Kellogg to 30.377 shares.
This purchase still leaves my position in Kellogg as underweight, however it has moved it up from the low-man on the totem pole. If the price remains in the low to mid-50’s I may look to add a little more as well.
Whether this turns out to be my last purchase of 2018 or not, I can say that I am pleased that I was able to add to a long-standing company in the Consumer Staples sector and boost the portfolio weighting slightly.
Given that I was able to add these shares at an approximate 14% discount to where I was originally looking to take a nibble makes it just that much sweeter. There are still plenty of buying opportunities available and I will most definitely be looking to make use of the last two market days of the year.
The additional $33.60 in projected annual dividend income has now boosted me up to…
Wait, rather than tell you now, you will have to tune in next week for a post recapping my 2018 goal progress!
While I know Kellogg has not really been a popular name across the DGI community, I’d love to hear what you think about this purchase.