When it comes to cereal, few names hold the weight of Kellogg (K +0.00%). But this packaged food maker has been working hard over the past few years to broaden its offerings and augment its growth prospects. In fact, cereal only makes up around a third of its business today.
Generally speaking, the makeover has been going well. The problem is that the coronavirus pandemic is currently making results look weaker than they may actually be. Here are five charts that will help you better appreciate the progress that Kellogg is really making.
Image source: Getty Images.
1. An odd bump
OK, so this first chart is really a table, but it makes the point more clearly. Coming into 2020, Kellogg had basically just completed a big asset sale and, leading up to that, a few important acquisitions. The goal was to get sales back on the growth track by repositioning around stronger product categories -- and it looked like it was working. In the final fiscal quarter of 2019, organic growth increased by around 2.7%. That's a pretty good number for a packaged food company, but then the pandemic hit and consumer buying habits drastically changed.
|
Kellogg Organic Growth | ||||
|---|---|---|---|---|
|
First Quarter 2020 |
Second Quarter 2020 |
Third Quarter 2020 |
Fourth Quarter 2020 |
First Quarter 2021 |
|
8% |
9.2% |
4.5% |
2.5% |
4% |
Data source: Kellogg.
Organic growth ballooned in the first and second quarters of 2020 and has since slowed down. On the surface, that might look like a bad thing, but the pandemic was really a one-time windfall, not an ongoing trend. In fact, the company has been using a two-year compound growth rate to try to smooth out the results and show what it believes is the true underlying trend. It expects full-year organic growth to be roughly flat year over year in 2021, which looks terrible, but would amount to a 3% two-year compound annual growth rate. That is not a bad number in the packaged food space, suggesting that Kellogg is still on track with its revitalization efforts.
2. Making hay
But Kellogg hasn't let the windfall of 2020 go to waste, as the chart below shows.
K Total Long Term Debt (Quarterly) data by YCharts.
Indeed, all of the wheeling and dealing the company did leading up to 2020 left it with an elevated debt load. It used some of the cash from asset sales in 2019 to reduce debt, but thanks to the extra cash flowing in during the pandemic, it was able to put even more cash toward cutting the debt balance than it was expecting as 2020 unfolded. Long-term investors should be pleased to see management make a financially prudent call like that.
3. An ongoing benefit
Debt reduction has other benefits as well. For example, interest costs fall when debt goes down. As the chart below illustrates, the combination of strong operating results and a declining debt load has drastically improved Kellogg's interest coverage. That means more cash is falling to the food maker's bottom line, which makes complete sense given that less debt means lower interest expenses.
K Times Interest Earned (TTM) data by YCharts.
4. A better balance sheet
In addition to lower interest costs, debt reduction has notably improved Kellogg's financial strength. Its debt-to-equity ratio, a financial metric that looks at a company's balance sheet health, has fallen significantly as well. All told, Kellogg is in a much better financial state than when it entered 2020, and the pandemic-driven boost in demand, even though it is starting to cool off, is the main reason.
K Debt to Equity Ratio data by YCharts.
5. Charging higher
This brings us to the final chart, and perhaps the one that many investors will care about most. Kellogg's dividend continues to increase, and -- despite what may look like weakening organic sales growth -- that isn't likely to stop given the improved financial position of the company. In fact, if anything, dividend investors should recognize that the pandemic has made Kellogg's dividend even more secure.
K Dividend Per Share (Annual) data by YCharts.
Boring is beautiful
At the end of the day, Kellogg's business is really pretty mundane. And yet the last few years have been surprisingly eventful, with a big corporate overhaul and a global pandemic. That's made it a bit harder to see what's really going on in the company, largely due to the coronavirus-related boost in demand in 2020 that's now starting to fall away. However, the charts (and one table) above show that Kellogg is still growing its business and is in better financial shape than it was prior to the pandemic, which should make rewarding investors with ongoing dividend growth that much easier. Keep that in mind as you watch what are likely to be disappointing quarterly comparisons through the rest of the year.
