You don't have to love cereal or cookies to appreciate Kellogg (NYSE:K). One of the largest food companies in the world, Kellogg has seen its stock perform relatively better in the past year than has the rest of this mostly moribund sector.
Sales for the second quarter were up 8.4%, with 6.6% of that growth being described as "organic" (that is, not due to foreign exchange or acquisitions). North American sales rose 8% on double-digit cereal growth and on an 8% growth in snacks. International sales grew 3% net of foreign currency, with strong growth in Latin America and Asia offset by softness in Europe.
Gross margin also improved nicely, while operating margin held steady. Further, the company posted 22% growth in year-to-date free cash flow and ongoing progress with both debt reduction and working capital management.
Just yesterday, fellow Fool Steven Mallas took Kellogg to task for a sub-par recent history of dividend increases. Not only do I think Steven misspells his first name, but I also think he missed an important point with Kellogg.
When Kellogg bought Keebler in 2000, the cereal specialist took on a considerable amount of debt -- going from about $2 billion to as much as $6.8 billion. Since then, it's spent a fair bit of its cash flow on reducing that debt, and it now stands at about $4.7 billion. With debt coming back to a more reasonable and manageable level and the business still generating good cash flow, I think the future of Kellogg's dividend policy will be brighter than in the mere past five years.
Part of my confidence comes from the company's decision to make significant investments in brand-building. This means we should all expect to see a lot more Kellogg advertising and promotions targeted toward consumers. And I think that's a good investment -- selling food products is just as much about selling a brand as it is a flavor, and these investments should pay off over time.
Food stocks are pretty snoozy for the most part, but I have recently gotten more interested in the likes of Unilever (NYSE:UL) and Groupe Danone (NYSE:DA). I was surprised to learn that Kellogg actually has exceptional operating margins and return on assets relative to the industry. I'm not sure that a 10% valuation premium in terms of a forward P/E is sufficient recognition of that superiority, so I think I'll be adding these shares to my "learn more" list.
For more Foolish food follies:
- Kellogg Sweetens Dividends
- Rumors Fermenting Around Danone
- Unilever Looks for Growth Leverage
- One Cool Deal for Heinz
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
