Kellogg Is on the Rise

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The 11% jump in Kellogg's (NYSE: K  ) share price since late July, when it hit lows around $45 per share during the Midwest heat wave, may concern some investors. Another reason for caution might be continued high commodity costs, which are always a concern for food and staples companies. And $18.4 billion Kellogg is no exception, nor is it immune to the pressures impacting its industry brethren.

So why is Kellogg worth your consideration despite the concerns? Thankfully, there are several reasons.

The many upsides of Kellogg
Kellogg announced yesterday that it has entered into a joint venture with Wilmar International to distribute Kellogg cereals and snack products to Chinese consumers, adding to its existing presence in the market. The partnership is a major win for shareholders, as well as for CEO John Bryant and his team.

Wilmar is one of the leading distributors of food products in China, providing Kellogg with instant access to a firmly established supply chain and sales network. And as a market with a seemingly unending appetite for packaged brand-name foods, China is ripe for growth.

How big of a deal is it? Consider this: The Chinese snack food market is expected to reach $12 billion by the end of 2012 -- an increase of 44% since 2008. The dramatic growth in consumer sales will lead China to become the largest food and beverage market in the world within five years. That's heady stuff for anyone, let alone Kellogg, which should finish 2012 with around $13.5 billion in annual revenue.

Even after the summer run-up in stock price, Kellogg remains a fundamentally sound option in what is a reasonably valued industry. On a price-to-earnings basis, only General Mills (NYSE: GIS  ) and its P/E of 15.66 compare to Kellogg, which has a P/E of 15.74. Kellogg's ROA of 9% and ROE of 51% also trump General Mills' ROA of 8% and ROE of 22%. Keep in mind that Kellogg's astounding 51% ROE is a result of its debt-laden capital structure, with a debt-to-equity of 385%. This is more than three times higher than both Kraft Food's (Nasdaq: KFT  ) and General Mills' debt-to-equity ratios. As another major player in the sector, Kraft lags behind Kellogg on all measures of profitability.

Of course, with the split of Kraft less than a week away, valuing the soon-to-be-independent Kraft snack division is dicey. But most agree the real reason for the split is to unlock shareholder value in the snack unit of the business.

In addition to ROA and ROE, two key indicators many investors use to measure management effectiveness -- net income margin and operating margin -- again point to Kellogg over General Mills or Kraft Food. There are even inklings that the impact of the drought this past summer is waning. As the weather improves domestically and in important markets like Brazil, the hope is that pressure on agricultural commodity prices will ease.

Another feather in Kellogg's cap is its 3.42% dividend yield, which is the fifth-highest in the packaged-food and meats sector. Kellogg has also been paying dividends steadily since the 1920s. The combination of the nice yield and track record of consistent dividend payouts makes Kellogg worthy of your consideration.

Kellogg also boasts a low beta of 0.45, which speaks to its stability relative to the inevitable ups and downs of the market. Though it could be argued that this limits Kellogg's potential for upside growth as the market rebounds, the same limit applies to downside risk, too. As always, when it comes to investing, Fools have to give a little to get a little. In Kellogg's case, that means sacrificing some appreciation potential for less downside risk -- not a bad trade-off for the right portfolio.

So is Kellogg's stock for you?
If you're in need of steady (if not spectacular) growth, want an impressive level of quarterly income, and appreciate the value of a strong team at the top, Kellogg could make a sound basis for your portfolio. Its recent performance in difficult economic conditions -- droughts domestically and financial problems internationally -- is a testament to the effective leadership of Bryant and his management team.

Now toss in the agreement with Wilmar and the outstanding potential it offers Kellogg shareholders. When you add the Chinese expansion opportunity to what is already an outstanding fundamental value, Kellogg looks even better.

As good as Kellogg's dividend payment history is, it's not the only industry leader with a sound record of paying shareholders. Income seekers will find a number of alternatives to Kellogg in the Fool's special free report: "Secure Your Future With 9 Rock-Solid Dividend Stocks."

Fool contributor Tim Brugger currently holds no securities positions mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

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