Dividend Increase: Kellogg Co. (K)

Kellogg Company (K) slipped their dividend increase announcement late last Friday.  The new quarterly dividend is $0.52 per share, up from the prior $0.50, representing a 4% increase yoy.    That is in line with my expectations for the companies dividend growth and about what I would expect going forward.  The new yield is 2.54% based on the current $81.87 share price.  The cereal and snack maker is best know for is Special K cereal, but has also acquired several brands over the year, including Keebler, Kashi, Pringles, and several overseas snack brands.  They’re also known for everyone’s favorite talking cereal and Pop Tarts.

So why invest in the boring cereal/snack maker?  While the dividend growth isn’t anything spectacular, it is sustainable.  I can at least keep my income levels keeping pace with inflation at a sustainable level, at best slightly outpace inflation.  But the real secret sauce here (like CBOE), I’ve been expecting a takeover for quite some time.  I expect consolidation to happen in the grocery store aisle, and Kellogg’s is one of my acquisition targets.  So, in the meantime, I get paid a decent dividend and get some appreciation while I wait.  If that doesn’t happen, at least I’m getting a steady growing dividend while I wait it out.

How long have I been waiting for a takeover?  Well, I purchases K back in January 2014 at $60 and up until recently, there has been no rumor of a takeover.  Notice until recently.  Apparently rumors have started to swirl lately (and die down) on Wall Street of a takeover of K.  I’m still holding out hope.

The best match, in my opinion, is General Mills (GIS).  The combined company could experience huge cost savings, improve margins, and basically control the sugary breakfast aisle.  Other suitors could be Mondelez or Kraft.

Let’s look at the dividend history that dates all the way back to 1925.  If not for a 4 year dry spell (2001-2005), the streak of dividend increases would date back to 1973.  However, with the dry spell, the most recent streak of dividend increases stands at 12 years.

The average dividend increase for the last 12 years has been 5.76% and an average growth of 5.59% in the annual dividend income when taking into account the timing of increases.  What I want to draw your attention, is the income growth despite the low dividend growth rate of 5.76%.  Investing back in 2004, your dividend income per share would be $1.01.  Looking a decade later, your dividend income is $1.90, almost double.  This falls inline with my plans for hitting $40,000 in passive dividend income in early 2020’s and $80,000 in early 2030 (look for a really nerdy post coming soon showing some math on this!).

Lets look at some stock stats on K:

Market Cap: $28Billion

P/E Ratio: 51

Payout Ratio: 59% trailing 12 months

Total Cash: $310Million

Total Debt: $8.25Billion

Profit Margin: 5%

Beta: 0.45

My concerns with K at the moment: that rich P/E for a low growth and low margin business.  Also, that’s a high debt load.  I won’t be adding to my position, just looking for that takeover to happen.

K vs S&P500

K

K has slightly outperformed the S&P500 over the last decade.  Nothing to write home about really.  I guess you could argue, it outperformed while technically taking lower risk when looking at the beta.

Kellogg’s reports earnings on August 4.  Interestingly enough there was an options trade going through today for the Aug 16 95 calls (5oo contracts at $0.20).  So either the takeover rumors are not dead, or someone has $10,000 to blow, since those are deep out of the money and expire in 2 weeks.  If there is a takeover, look for that trade to get flagged for insider trading.

For those keeping track at home, this is my 28th dividend holding announcing an increase for the year, with just 1 (DD) decrease for the year.  I’m happy to use a boring company like this to illustrate my plans for a slow and constantly growing passive income stream in early retirement.  I’m pretty confident the income plan will come to fruition, despite a slow growing US economy and should hold string despite any future recessions.

 

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Readers Comments (2)

  1. Do you think any merger would be allowed? Closing in on monopoly territory, depending on the buyer.

    • If not approved, what could happen is the combined company tries to sell off some brands to a 3rd party, say Post Holdings (POST) or one of the other food giants, to get approval. I was looking more into the rumors, and apparently the rumored company was Kraft, but that supposedly died down.

      RAI, LO, and BAT had a similar arrangement in the RAI/LO takeover.

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