Big dividend hikes are a common way that mature businesses demonstrate a commitment to their shareholders. This is one reason why, under the direction of Chairman and CEO Warren Buffett, Berkshire Hathaway's $382 billion investment portfolio is loaded with dividend growth stocks.
Among the holding company's dozens of investments, its stake in Mondelez International (MDLZ +0.51%) is one of the smallest, valued at just $43 million. Is this consumer staples stock a buy for investors seeking strong dividend growth after its recent 10.4% hike in its quarterly dividend per share to $0.43? Let's dig into Mondelez's fundamentals and valuation to resolve this question.
NASDAQ: MDLZ
Key Data Points
Enviable brands are driving remarkable results
It's a well-known fact that Berkshire Hathaway prefers to invest in businesses with tremendous brands that are in high demand. The reasons for this aren't complicated: Brands that are part of customers' routines benefit from more frequent consumption, which also provides owners with the pricing power necessary to grow net revenue and profits.
Mondelez boasts the leading share in the global cookies and crackers snack market and the second-highest share in the chocolate category, which is probably why Berkshire owns it. Mondelez's most iconic brands include Honey Maid graham crackers, Philadelphia cream cheese, Stride gum, and Triscuit crackers.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Organic net revenue growth rate | 13.1% | 15.8% |
| Net margin | 12.3% | 12.8% |
| Diluted share count (in millions) | 1,389 | 1,372 |
Data source: Mondelez International.
Mondelez's net revenue grew by 17% year over year to $8.5 billion during the second quarter ended June 30. The company's price hikes to the tune of 15.8% largely powered top-line growth. Because consumers particularly enjoy Mondelez's products, its volume was flat in the quarter. This implies that the company faced little to no pushback from consumers on the higher prices that it implemented to keep up with increasing expenses.
Acquisitions of Clif Bar and Ricolino also added to Mondelez's net revenue for the quarter. This partially offset the unfavorable foreign currency translation that it faced due to its worldwide footprint amid the recent strength of the U.S. dollar.
The company's non-GAAP (adjusted) diluted earnings per share (EPS) climbed higher by 16.9% over the year-ago period to $0.76 during the second quarter. And when excluding foreign currency headwinds from its results, Mondelez's currency-neutral adjusted diluted EPS soared by 21.5% in the quarter.
Slower growth in the company's major expense categories than in net revenue helped its non-GAAP net margin expand by nearly 50 basis points for the quarter. Coupled with a lower share count stemming from share buybacks, Mondelez's currency-neutral adjusted diluted EPS growth rate was able to top net revenue growth during the quarter.
As the company continues to acquire more popular brands to strengthen its portfolio, its outlook should remain encouraging. That's why analysts think Mondelez's adjusted diluted EPS will grow by 9.3% annually for the next five years. Put into perspective, that's even with the confectioners industry average annual earnings growth forecast of 9.3%.
Image source: Getty Images.
The market-beating payout is safe
Mondelez's 2.1% dividend yield probably won't stand out to you. But it is better than the S&P 500 index's 1.5% yield. And having delivered 203.6% cumulative dividend growth to shareholders over the past 10 years, Mondelez's track record of dividend growth has been solid, to say the least.
The company's dividend payout ratio is also poised to come in at approximately 49% in 2023. That builds a buffer into Mondelez's dividend, which can support improvement in its balance sheet and fund growth opportunities. This is why I am confident that annual dividend growth will be around 8% to 10% for the foreseeable future.
An appealing valuation
Shares of Mondelez have gained 16% in the last 12 months. But despite this rally, they still look like a deal for dividend growth investors: Mondelez's forward price-to-earnings (P/E) ratio of 21.1 is less than the confectioner industry average forward P/E ratio of 21.9. That's why I believe the stock is a buy at the current $74 share price.
