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Kellogg Stock Is Moving Higher as Revenue Declines Slam into Reverse

Will Healy

Food companies have long served as a source of recession-proof profits and increasing dividends. However, stocks such as Kellogg Company  (NYSE:K) and its peers have come under increasing pressure over the last few years. Revenues have trended downward as consumers buy fewer packaged foods. Kellogg’s has responded to this and Kellogg stock has seen modest success.

Kellogg Stock Dividend

While not a dividend aristocrat, Kellogg stock, and peers such as Kraft Heinz Co (NASDAQ:KHC), General Mills, Inc. (NYSE:GIS), and Campbell Soup Company (NYSE:CPB), have enjoyed a decades-long history of high, consistent dividend payments.

Kellogg has increased its dividend every year since 2005. It has also not cut its dividend since 1997. Consequently, its current dividend yield stands at 3.1%, well above S&P 500 averages.

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Analysts expect 2018 profits to come in at $4.45 per share, an increase from $4.04 per share in 2017. With that, its current $2.16 per share dividend, and the ability to increase it in future years should remain intact.

The company credits both cut costs and revenue increases with this improvement.

Kellogg began Project K in 2013. Project K involved an initiative to consolidate its supply chain and improve its productivity to cut costs. Kellogg’s believes it will save the company $600-$700 million through 2019. They also credit a move to zero-based budgeting with saving the company an additional $450-$500 million over a three-year period.

Kellogg Stock Bounces Back

Although cost cuts do not constitute a long-term growth strategy, Kellogg’s has also worked to reverse its revenue declines. Analysts believe 2018 will mark the first year since 2013 that company revenue has increased. They expect further increases in revenue in 2019.

This is likely the result of the company moving to address some of the more objectionable qualities of its packaged foods. In a world that prefers fresher foods, the packaged foods that Kellogg sells remain less popular. The company has spent most of the decade addressing this issue.

In 2012, Kellogg eliminated all high fructose corn syrup from its foods, although many still object to the sugar content. Also, less recognizable ingredients such as potassium chloride or riboflavin have been placed in a “vitamins” section. This should alleviate some of the fears of consumers who now refuse to buy products with ingredients they do not recognize.

The market has rewarded Kellogg stock by bidding the price up to 12-month highs. It remains about 20% below the all-time high the stock saw in 2016. Still, I believe in time it will again reach that $87.16 per share record high and then move beyond it.

One possible indicator is found in the average price-to-earnings (PE) ratio. The current PE stands at 16.75, well below the 32.92 average PE ratio over the last five years.

I believe Kellogg can again reach that PE. Will other stocks outperform Kellogg’s? Most likely, yes. However, for those wanting a high dividend equity in a company with a familiar product line, Kellogg can serve that need well.

The Bottom Line on Kellogg Stock

Kellogg should benefit as the company continues to increase the dividend, cut costs, and address many objections about its packaged foods. Revenues declined for years as consumers turned away from packaged foods. Still, Kellogg has moved to cut costs and evolve as much as a packaged food company can towards changing consumer tastes.

The company has also maintained an above-average dividend that it can increase every year for years to come without profit growth. Kellogg will likely not excite investors.

However, investors looking for both a high, growing dividend and stock price growth will probably find these qualities in Kellogg stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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