After declining 40% from its all-time high in mid-2016 to its five-year low in late-May 2019, the Kellogg Company (NYSE:K) share price reversed direction and has been riding a relatively stable uptrend over the last six months.
In addition to the current share price advancement and an average long-term uptrend, the Kellogg Company has rewarded its shareholders with a 15-year long streak of consecutive annual dividend hikes as well as 57 annual dividend boosts in the past six decades.
Share price volatility and decline since the peak in mid-2016 countered all dividend income payouts and delivered total losses to the company’s long-term shareholders. However, despite moderate volatility, each decline over the past three decades offered new investors an opportunity to assume a long position in the stock and take advantage of the share price’s post-pullback recovery.
Notwithstanding the short-term declines and recoveries, the share price has maintained an average uptrend. Additionally, as indicated on the graph below, the current share price is below its average since 2000 — the green line — as well as since the 2008 financial crisis — the red line.
The share price decline reflected some headwinds that Kellogg encountered over the past few years, as well as investor’s uncertainty whether the company would be able to respond quickly and effectively. One of the issues was the inefficiency of the distribution network that Kellogg was using to deliver its products. While efficient and cost effective for companies with minimal product selection and large volumes, the manufacturing facility to direct-store delivery (DSD) setup was not efficient enough to meet Kellogg’s needs.
Therefore, the company invested substantial funds and resources to optimize its distribution by changing its network to a group of centrally located warehousing facilities that receive individual product lines directly from the manufacturing facilities and build assorted shipments for direct-store deliveries.
Another major business uncertainty was the divestment of the company’s cookies business in the first half of 2019. Kellogg announced in April that the company would transfer all assets of its cookies business to the Italian manufacturer of chocolate and confectionary products, Ferrero SpA. By the end of July 2019, the two parties finalized and completed the transaction valued at $1.3 billion, which included the Keebler, Mother’s, Famous Amos, Murray’s and Murray’s Sugar Free brands.
Financial Results
The cookies business divestment had a direct impact on the company’s third-quarter results that Kellogg announced on October 29, 2019. While organic sales rose 2.4% for the period, reported net sales of $3.37 billion were almost 3% lower than the $3.47 billion figure from the same period last year.
Reported operating profit of $263 million and reported earnings per diluted share of $0.72 were approximately one-third lower than in the same period last year. This decline was driven mainly by the recognition of withdrawal liabilities related to the company’s exit from certain multi-employer pension plans, payable over the course of up to twenty years.
The adjusted earnings per diluted share of $1.03 were 2.8% lower than the $1.06 per share figure from one year earlier. However, despite falling short of the previous year’s figures, the third-quarter earnings per share beat the analysts’ expectations of $0.91 by 11.7%. In light of its financial performance so far in 2019, Kellogg reaffirmed its outlook for full-year 2019. The company expects a 1% to 2% net sales increase and only a 4% operating profit decline. Additionally, even without the favorable tax benefits from last year, Kellogg expects its adjusted earnings per share to decline only 10%, which is on the favorable side of the original decline estimated between 10% to 11%.
“We remain squarely on strategy and on plan, and this is reflected in our third quarter results,” said Steve Cahillane, Kellogg Company’s Chairman and Chief Executive Officer. “Our reshaped portfolio is doing what it is intended to do, focusing on our higher growth categories and markets. We have revitalized key brands through improved brand-building and enhanced innovation. And, as we move past our heaviest investments and costs, we are on track for delivering gradual improvement in profitability. While fully recognizing that we still have work to do, I’m very pleased with our progress,” added Mr. Cahillane.
Share Price
The share price entered the trailing 12-month period riding a downtrend that began in September 2018. After dropping nearly 16%, the share price reached its seven-year low of $52.06 on May 30, 2019. The share price recovered all those losses by the beginning of August and advanced further to reach its 52-week high of $65.43 on November 18, 2019. By the end of trading two days later, the share price declined marginally and closed on Nov. 20 at $65.38. This closing price was 5.6% higher than it was one year earlier and 25.6% above the 52-week low from late-May 2019.
The share price decline over the last three years erased all gains from dividend income payouts and delivered a 1% total loss to the shareholders. Over the extended period of five years, dividend payouts managed to compensate for the 1.3% share price shortcoming and provided a 15% total return. However, the rapidly rising share price over the last six months and dividend distributions combined for a 10.5% one-year total return.
Kellogg Company (NYSE:K)
Founded in 1906 as the as Battle Creek Toasted Corn Flake Company and currently headquartered in Battle Creek, Michigan, the Kellogg Company manufactures and markets ready-to-eat cereal and convenience foods. The company operates through U.S. Morning Foods, U.S. Snacks, U.S. Specialty, North America Other, Europe, Latin America and Asia-Pacific segments. The Kellogg Company’s main products include crackers, savory snacks, toaster pastries, cereal bars, granola bars and bites, fruit-flavored snacks and ready-to-eat cereals. The company also offers a line of frozen breakfast foods, including waffles, pancakes and French toast. In addition to the Kellogg brand, the company offers its products under the Kashi, Bear Naked, Eggo, Morningstar Farms, Cheez-It, Pringles and several other brands. In addition to 25 manufacturing facilities in the United States, the Kellogg Company operated an additional 31 plants to support the distribution and sales of its products in approximately 180 countries around the world.
Ned Piplovic is the assistant editor of website content at Eagle Financial Publications. He graduated from Columbia University with a Bachelor’s degree in Economics and Philosophy. Prior to joining Eagle, Ned spent 15 years in corporate operations and financial management. Ned writes for www.DividendInvestor.com and www.StockInvestor.com.
