2023-05-24 12:41:03 ET
Summary
- Consumer staple stocks tend to have lower volatility in uncertain times because people continue to need food.
- Kellogg and General Mills are two consumer staple companies that are known for breakfast foods, albeit with more diversification.
- Currently, Kellogg might be a better option because of anticipated spin-off.
In an uncertain economy, investors can expect the stocks of many companies to underperform. Lower economic growth might lead to lower demand for products that go into building skyscrapers or roads. Higher unemployment can lead to lower demand for gasoline as fewer people have to drive to work. This could hurt companies that focus on producing oil or building materials.
Regardless of what the economy does, people are still going to eat. They need food to fuel their lives. They might decide to cut back in certain areas on their grocery shopping list, but they will still buy food and other consumer staples like laundry detergent and toilet paper. That's why it can pay to hold consumer staple stocks during a recession.
A couple of solid consumer staple companies that investors might find interesting are Kellogg ( K ) and General Mills ( GIS ). These companies might seem to inhabit similar spaces in the investment and the consumer staple markets, but one might hold an edge currently for a couple of key reasons.
Both Kellogg and General Mills are best known for providing breakfast cereals that show up on tables across the country and the world. They both have popular brands. Kellogg offers Frosted Flakes and Eggo Waffles (I ate the former while living in Lithuania for a few months); General Mills provides Honey Nut Cheerios and Bisquick. However, they offer more than just breakfast foods, both produce and sell snack foods, while General Mills owns Blue Buffalo pet foods and Kellogg has entered the plant-based food market. Both are diversified in terms of the products they offer and the markets in which they sell those products.
Financials
GIS is larger in terms of annual revenue, clocking in with nearly $19 billion in sales over the past 12 months as of its most recent annual report . Kellogg recently exceeded the $15 billion mark in annual revenue . Both have had trouble growing revenue over the past ten years, although General Mills has increased sales by a little over $1 billion over the past ten years. This trend would make it appear that GIS is a more attractive buy, however, there are other metrics to investigate. Kellogg has basically seen its revenue come in flat over its past 10 annual reports, with very marginal revenue growth from 2013 to 2022.
In terms of net income, GIS again comes in with a better showing against K. General Mills has grown its net income from $1.855 billion in 2013 to $2.707 in May 2022. This is an increase of about 50% over the past 10 years. Kellogg's net income has actually decreased. It hit a 10-year high in 2013 at $1.807 billion, but that number dropped to $960 million in late 2022.
The most recent quarterly report for K showed an increased guidance for FY2023, estimating a 7% growth in net sales and a 10% growth in operating profit. There is a slight hit expected to net income because of pension headwinds and higher interest rates on debt.
When it comes to valuations, this is where Kellogg appears to be a better buy at present. Looking at the estimated forward earnings, Kellogg clocks in with a PE ratio of 16.68 (as of close on 5/23/2023), whereas General Mills has a forward PE of 20.21. It's important to remember that these are forward looking estimates, but based upon the most recent annual reports of the respective companies, Kellogg earned $2.79 per share, whereas General Mills is only slightly higher at $4.42 per share. The estimated EPS for the next 12 months is more even, with GIS estimated at $4.24 and K estimated at $4.10. It's important to keep in mind that forward-looking estimates are just that, estimates. Also, when looking back at the most recent annual reports, General Mills appears more attractive.
Dividends
I'm an investor who has an interest in building a portfolio of dividend-producing stocks and funds, and this is an area in which Kellogg is outpaces General Mills. The numbers are based upon a $68.53 closing price on 5/23/23 for Kellogg and $85.47 for General Mills.
Kellogg currently pays out a $2.36 dividend vs. $2.16 for General Mills; based upon the current prices of the respective company's stock shares, K's dividend yield is currently 3.45% vs. a yield of 2.52% for GIS. This is not an insignificant difference, and it can really start to add up when reinvesting the dividend in a person's accumulation phase.
Neither company is in danger of having a dividend cut in the near term, as neither is even at a 60% payout ratio based upon income estimates for the next 12 months (K had a ratio of more than 80% over the past 12 months, however). GIS is slightly better in this regard, but both are in the lower to mid-50% range.
When it comes to dividend growth, neither is exactly setting the world on fire. However, they both show a history of growing the dividend. Kellogg has increased its dividend for 18 straight years. GIS, on the other hand, left its quarterly dividend at $0.49 per share for 13 straight quarterly payments between 2017 and 2020--not a cut, but not a long-term growing dividend either. Its dividend has grown for the past three years.
Wild Card
The biggest reason Kellogg is more interesting than GIS, however, is the fact that it is about to spin off a sector of its business. Initially, this was supposed to be two spin-offs, but the company recently decided to leave its plant-based meat business with the main parent company. Its snack food business will break off and be known as Kellanova , which will trade under the K ticker symbol.
Spin-offs frequently provide opportunities for higher growth in one or more of the companies that exist after the division. Additionally, shareholders in the parent company should also receive shares in all of the companies that exist after the spin-off. Kellogg stated it wanted to maintain the overall dividend across the companies, so a dividend cut would not appear likely at this point.
The spin-off is targeted for later 2023, so there is a bit of time to wait for those who want more info. A clearer picture of how many shares shareholders will receive in the new spin-off will emerge as the process continues, and this might influence some people's ultimate decision. I personally went Black Friday shopping last year and bought some shares of Kellogg, and I am open to purchasing more in the future. The higher dividend and the likelihood of a new spin-off company make Kellogg slightly more attractive (for dividend-focused investors) than GIS at present, although I would not be opposed to owning both at some point in the future.
For further details see:
Kellogg: Higher Dividend And Upcoming Spin-Off Makes It More Attractive Than General Mills