For a company to be a market leader in its sector, it is not just enough to report phenomenal financial values or pay out huge sums of dividends to its investors. Staying “on top of things” is very important. It is quite easy to become the leader; however it is very tough to retain that position. In the list of companies that have worked their way up the ladder and intend to stay there for quite some time at least in the future, one name definitely finds a mention. It is Kellogg (K, Financial).
Current position
Kellogg enjoys a monopoly in the US breakfast and cereal segment. Its snacks segment also enjoys great reputation among customers. What makes the company so successful across global markets? It is nothing but Kellogg’s ability to improvise on its brands and stay at least a few steps ahead of its competitors consistently. Now, the company is so successful that its position looks undisputed for the next 5 years at least. Currently, the dividend yield is 3.10% and with lots more cash generating opportunities on the anvil, the dividend pay-out is only set to increase in the coming years, which is great news for investors.
Recent jolt and recovery path
During the fourth quarter of 2014, Kellogg’s cereal business, which contributes to 45% of its total sales, took a huge hit, as sales dropped by 7.7% compared to the same period last year. The reason for the drop was decreased demand for cereals and an overall change in the eating habits of consumers. Though cereals were considered healthy, people started preferring home-made healthier options like soups, smoothies, porridges and other options for their breakfast, resulting in a drop in demand for cereals. Alarmed by this low demand, Kellogg got into action quickly and did some active branding and advertising moves to lift up the image of its cereal segment. During this time, the advertisement costs spent by Kellogg as a percentage of sales, on its cereal business, was the highest when compared to its peers (unnamed) as mentioned from the picture below:
Kellogg also launched a new product known as Disney Frozen-themed cereals in order to give a facelift to its drowning cereal market. Since all these initiatives happened during the last quarter of 2014, they will begin to show results this year. Analysts believe that the cereal segment will once again start looking up, giving a huge boost to the company’s shares in the market.
Future scenario
Kellogg will benefit immensely in 2015 from the cost savings generated by the company’s pet initiative, Project-K. This project has been growing and yielding returns as per expectations from the top management. The gains from this will be pooled back into the business to promote and develop the cereal segment. For 2015, Kellogg will focus on three important areas – Desire, Decide and Delight. As part of the first (desire) stage, it will invest hugely in all kinds of promotional activities that it can, in order to create a desire among the end-users. In the second (decide) stage, Kellogg will focus on improving the facilities of its in-house stores so that the users decide to buy its products. In the last (delight) stage, the company will invest hugely in improving the quality of its cereals and snacks, thereby providing ultimate delight to consumers.
As part of making the most use of its global exposure, Kellogg will pay special attention to expanding its business operations in emerging markets like Middle East, Asia, Africa, central Europe and Eastern Europe. When it took over the successful Pringles brand from Procter & Gamble (PG, Financial), Kellogg arrived strongly in the emerging markets. Kellogg’s and Wilmar International’s (China) joint venture has produced an impressive jump in net sales for Q4 2014 in the Chinese market. Kellogg’s is set to make its presence felt strongly in the Middle East as well, with an 85.93% acquisition deal worth $125 million of BiscoMisr, a biscuit company in Egypt. With such robust plans for the future, experts believe that Kellogg is one of those stocks that have to be in your portfolio. Stock movement of the company for the last few months is seen below:
Conclusion
With a pay-out ratio of 49% for 2014, Kellogg proves that it has a huge window to increase its pay-outs in the future. What works in favour of Kellogg is the success of its global business operations. It is this success that generates enough cash flow for the company to make its investors happy in the long run. Also, the company is making all the right moves when it comes to improving its products and widening its global customer base. Hence investors can be assured that the company is all set to grow phenomenally for the next 5 years at least.
