Dividend growth investing is gaining a real following over the past year as a viable strategy for boosting a retirement portfolio. And it's not hard to see why: Stocks that pay growing dividends tend to be less volatile overall, which can limit your losses during a correction or bear market. It's a big part of why dividend growth stocks, as an investment class, often outperform the broader market when it comes to total return.
The consumer staple Mondelez International (MDLZ 0.79%) is a great example of this trend. Looking at the past five years, Mondelez and the S&P 500 index were performing pretty much on par with each other on a total return basis during the first four years. But since early 2022, Mondelez is crushing the S&P 500's performance. So looking at the past five years overall, the stock's 124% total returns are now nearly double the 69% total returns delivered by the S&P 500.
This raises the following question: Are shares of Mondelez a buy for dividend growth investors? Let's look at the company's fundamentals and valuation to find out.
Mondelez's pricing power is shining through
With sales in 150-plus countries throughout the world, Mondelez International is a dominant consumer staple. The company is No. 1 in market share in the cookies and crackers snack categories and holds the No. 2 position in the chocolate category. This is all thanks to a formidable product portfolio that includes the likes of Ritz crackers, Oreo cookies, Chips Ahoy! cookies, and Clif Bar energy foods and drinks.
In the first quarter of 2023, Mondelez's net revenue soared 18.1% year over year to $9.2 billion. What was behind the Chicago, IL-based company's double-digit net revenue growth for the quarter? The growth was largely fueled by 16.2% price hikes that were passed onto consumers to offset its rising cost of sales and selling, general, and administrative expenses during the first quarter.
It helps that these higher prices were met with little to no pushback from consumers. This is what led Mondelez's total volume to grow by 3.2% in the quarter. These growth catalysts were only slightly counteracted by a 1.3% foreign currency translation headwind for the quarter. This was due to a combination of a strong U.S. dollar and Mondelez's global operations.
The company's non-GAAP (adjusted) diluted earnings per share (EPS) surged 9.9% higher over the year-ago period to $0.89 during the first quarter. Factoring out the foreign currency translation headwinds, Mondelez's currency-neutral adjusted diluted EPS would have grown by 17.3%.
Because the cost of sales grew at a faster rate than net revenue (19.6%) in the first quarter, the company's non-GAAP net margin contracted by 30 basis points to 14.3%. This reduced profitability was only partially offset by a decline in the diluted share count, which explains how Mondelez's adjusted diluted EPS grew at a slower clip than net revenue for the quarter.
Mondelez's significant pricing power and future acquisitions should translate into solid growth moving forward. That is why analysts anticipate that the company's adjusted diluted EPS will rise by 8.6% annually through the next five years. For context, that is in line with the confectioners industry average annual earnings growth outlook of 8.9%.
Image source: Getty Images.
A market-topping dividend that is sustainable
Mondelez's 2% dividend yield is just above the S&P 500 index's 1.7% yield. Some of the reason for that is strong stock price performance this past year. Mondelez outperforms when it comes to increasing its dividend. The company's per-share quarterly dividend effectively tripled over the last 10 years from $0.13 to $0.39.
MDLZ Dividend data by YCharts
Mondelez's dividend is likely to keep growing at a healthy rate in the future. The company's dividend payout ratio will clock in at a very sustainable 54% in 2023. That allows Mondelez to retain the funds necessary to invest in growth opportunities and further strengthen its balance sheet while also having enough left over to keep raising the payout.
The valuation multiple is appealing
With share prices up 17% year to date, Mondelez stock is performing quite well. But even with this recent run-up in the share price, the stock appears to be reasonably valued. Mondelez's forward price-to-earnings (P/E) ratio of 22.3 is slightly below the confectioners industry average forward P/E ratio of 24.1.
This performance combined with a reasonable valuation and a solid dividend arguably makes the stock a compelling buy for dividend growth investors.
