Kellogg (K -0.85%), with its everyday food products, saw its sales benefit from the pandemic as governmental restrictions and social distancing guidelines forced more people to eat at home. However, the stock has not seen an uptick. In fact, it is down by 14% over the last year.
Does this represent a value stock? To figure that out, it is necessary to do a deeper dive, since it could turn into a value trap, or a stock that seems undervalued. But a closer look at the fundamentals reveals longer-standing issues.
Stable products, slow growth
Kellogg is known for various foods such as snacks like crackers, cereal bars, and granola bars, and convenience foods like cereal and frozen waffles. Aside from its namesake brand, these are also sold under well-known names like Cheez-It, Pringles, and Eggo.
These consumer staple products have stable demand, but they haven't provided Kellogg's with much growth. In fact, its 2019 adjusted sales were $13.9 billion, only 1.9% year-over-year growth when stripping out the effects of acquisitions, divestitures, and foreign currency translations. Despite cost-cutting efforts, its adjusted profit fell by nearly 5% to under $1.8 billion. The prior year, sales were flat.
Last year was a different story, though. Naturally, with more people staying home and eating in, Kellogg's sales benefited. Its second-quarter adjusted sales rose by better than 9%. While management claimed it is now reaching new households and using data and analytics to help revenue growth, as authorities eased restrictions, people's normal buying habits started returning. Its third-quarter sales growth decelerated to 4.5%. However, this didn't translate into higher profitability, with its operating income falling by over 9%.
While accelerating COVID-19 cases may help boost Kellogg's short-term sales, undoubtedly this is a temporary phenomenon as coronavirus vaccines continue to receive governments' approval and get distributed, hopefully bringing things back to a relatively normal state shortly.
Dividend growth halted
While Kellogg had raised dividends every year since 2005, the company halted this streak last year. The dividend yield is a high 3.8%, but the lack of an increase certainly makes a statement about management's view of the company's prospects.
For the first three quarters of 2020, Kellogg's operating cash flow was $1.6 billion. After subtracting capital expenditures of $326 million, that left free cash flow of $1.3 billion, leaving plenty left over for the $586 million of dividends. However, taking a look at 2019, which is a more typical year since it didn't get the benefit of higher pandemic-induced sales, free cash flow was $590 million. This didn't cover the $769 million of dividends.
With a slow-growth company, dividends become more prominent for shareholders, since that is what they rely on for returns rather than price appreciation.
It is easy to get fooled by the faster growth experienced in 2020, but you shouldn't fall into the trap. Kellogg's sales increases have historically been anemic, and while there is a high dividend yield, the board of directors' decision to keep the same level last year doesn't bode well for the company's future.