Mondelez International Stock: Buy The Snack Giant (NASDAQ:MDLZ)

Daniel Bendjy

Slowly but surely, we are succeeding. This is true for stock investing because of mean reversion. For example, the latest group of new tech stocks were trading at bubble valuations and fell as the Federal Reserve began to tighten. On the on the other hand, some companies continually generate wealth for investors by slowly and steadily returning cash in the form of dividends and stock buybacks. One company that comes to mind is Mondelez International (NASDAQ:NASDAQ:MDLZ). There’s a lot to love with market leadership, rising revenue and earnings, and solid dividend growth. The stock is a Dividend Challenger and trading at a reasonable valuation. I view Mondelez as a long-term purchase.

Mondelez Overview

Mondelez was formed in 2012 after Kraft Foods split into two companies, Mondelez International and Kraft Foods Group. 3G Capital eventually acquired the Kraft Foods Group and later merged it with Heinz to form Kraft Heinz Company (KHC).

Subsequently, Mondelez underwent a reorganization. First, the company placed its coffee business in a joint venture with Douwe Egberts, eventually becoming JDE Peet’s (JDEP) (OTCPK: JDEPF), listed on the Amsterdam Stock Exchange. Additionally, the company owned shares of Keurig Green Mountain, which eventually became the property of Keurig Dr. Pepper (KDP) after the merger with Dr. Pepper Snapple Group. As a result, Mondelez still holds partial ownership of coffee stocksof which ~22.7% from JDE Peet’s and ~5.3% from Keurig Dr. Pepper.

Mondelez owns brands from the original Nabisco, Cadbury and LU Biscuits, making it one of the largest snack food companies in the world. They hold the world’s number one position in cookies and number two in chocolate and gum. Mondelez’s global brands are Nabisco, Oreo, Milka, Philadelphia, belVita, Cadbury, Toblerone, Trident, Tang and Halls. Other must-have brands are Ritz, Tate’s, Lacta, LU, What Thins, Swedish Fish, Triscuit and Chips Ahoy. Many brands are #1 in their market segment or geography.

Total revenue was $28,720 million in 2021 and $29,878 million in the last twelve months.

Trademark Chart

Mondelez Investor Relations

Growth and restructuring strategy for Mondelez

Mondelez expects to grow organic revenue by approximately 3-5% per year. The company generally follows the playbook of most packaged food companies by introducing product expansions, expanding distribution and marketing.

However, Mondelez is an acquisition company that adds growth through add-on acquisitions. The company has acquired eight companies since 2018, adding more than $2 billion in revenue. The strategy is apparently to buy promising brands as a platform where the company is underrepresented in a segment, a price or geographically. Subsequently, the company extends the new brand. The eight brands acquired are Tate’s Bake Shop, Perfect Snacks, Give & Go, Hu, Grenade, Gourmet Foods, Chipita and Ricolino.

In this sense, Mondelez announced the acquisition from Clif Bar for $2.9 billion, which ranks first in protein and energy bars. The new brand will add approximately $800 million in sales.

Table of brands acquired

Mondelez Investor Relations

In addition to revenue growth, Mondelez is increasing its margins through cost reduction. As a result, the company has reduced its emissions, food waste and water consumption compared to 2018. It has also reduced its packaging waste, moving to 100% recyclable packaging by 2025.

Mondelez exits non-strategic assets after strategic review. Instead, the company will focus on cookies and chocolate. Therefore, it will divest the developed gum market and the global theater business, representing approximately $920 million in revenue. The change in focus includes the sale of the Halls, Stimorol, Hollywood, Dentyne and Trident brands. Additionally, the company is selling its interests in JDE Peet’s and Keurig Dr. Pepper. He plans to use the proceeds to add to the snack portfolio.

Trademark Assignment Chart

Investor Mondelez Reports

Competitive advantages

Mondelez has several competitive advantages. First, the company is by far the market leader in cookies, with around 17% global market share in the $104 billion market category. Campbell (CPB) is number 2 but with only around 3 to 4% market share. In fact, Mondelez has a larger market share and faster growth than many of its top competitors combined. Besides Campbell’s, other competitors include Kellogg (K), Pladis, Ferrero, PepsiCo (PEP), Britannia, Parle, Barilla and Nestle (OTCPK:NSRGY). This scale and size allows Mondelez to spread distribution and manufacturing spend across more brands and greater volume.

Next, the company is a solid No. 2 in the global chocolate market with around 12% global market share in the $112 billion category. Private company Mars is No. 1, but Mondelez is growing faster and gaining market share. Only Hershey (HSY) is growing faster. Besides Mars and Hershey, other competitors include Ferrero, Nestlé, Lindt, Storck, Pladis, Lotte and Uniconf.

Additionally, Mondelez has some very recognizable brand names. Consumers are familiar with brands like Oreo, Cadbury and belVita. The combination of excellent brand recognition, dominant market share and high sales volumes gives the company an advantage for product placement at retailers.

Finally, Mondelez has an excellent and disciplined capital allocation focused on core business reinvestment, integrated M&A, dividends and share buybacks, and balance sheet.

Risks for Mondelez

Mondelez faces inflation and input cost risks despite its strength and market leadership. Most inputs are products like sugar, flour, cocoa, wheat and dairy products and prices fluctuate. The business is also subject to risks related to energy costs, labor and freight. Therefore, higher prices can negatively affect margins. Additionally, as a US company with global operations, a strong dollar will lead to headwinds on exchange rates.

Dividend analysis

Mondelez pays an annual forward dividend of $1.54, resulting in a dividend yield of 2.40%, above the 5-year average of 2.14%. The dividend yield is also higher than the average yield of the S&P 500 index. Additionally, the company has increased the dividend for nine years, with the streak dating back to 2014, making the stock a Dividend Challenger.

The dividend yield and double-digit growth make the stock attractive to many investors.

Mondelez last increased the quarterly dividend in July 2022 to $0.385 from $0.35 per share. The dividend growth rate has been 13.06% CAGR over the past five years. Additionally, the reasonable payout ratio of around 46% combined with the rising earnings per share means that the dividend will likely be increased in the future.

Chart

Portfolio overview

Mondelez has excellent dividend security in the context of earnings, free cash flow (FCF) and balance sheet.

Consensus estimates for fiscal 2022 for Mondelez are $2.91 per share and the dividend is $1.54 per share. These figures produce a forward payout ratio of approximately 48%. Our target payout ratio is 65% indicating the dividend is safe with a decent buffer and room for growth.

Mondelez had approximately $4,316 million in free cash flow (FCF) over the past 12 months. The dividend required about $1,907 million, giving a dividend/FCF ratio of about 44%. This value is excellent and below our 70% threshold, suggesting little risk for the FCF-based dividend.

The balance sheet has acceptable liquidity, leverage and interest coverage.

At the end of the second quarter of fiscal 2022, Mondelez had $605 million in short-term debt, $746 million in current long-term debt, and $17,861 million in long-term debt. Total and net debt has been remarkably constant over the past few years. Total debt was offset by $1,924 million in cash and cash equivalents and $126 million in short-term investments. As a result, the leverage ratio is around 2.6X and interest coverage is around 14.2X, both solid for a consumer staples company. Cisco has a lower to medium investment grade credit rating of BBB/Baa1 from S&P Global and Moody’s. Debt is nothing to worry about from a dividend security perspective.

Evaluation

The Mondelez share price has done relatively well in 2022. The total return since the beginning of the year is around (-7.0%) and the 1-year return is around 1.2 %, much better than the S&P 500 index and the Nasdaq. Additionally, the stock is trading at a price-earnings ratio of around 21.1X, slightly below its range over the past five and ten years.

Consensus analysts’ earnings estimates for 2022 are now $2.91 per share. Therefore, we will use 21X as a reasonable value for the payout multiple. This number is lower than the average of the last decade. However, we factor in headwinds from global inflation and recession fears.

Our fair value estimate is $61.11. The current stock price is around $61.33, suggesting that the stock is correctly valued based on estimated earnings.

Applying a sensitivity calculation using price/earnings (P/E) ratios between 20X and 22X, we obtain a fair value range of $58.20 to $64.02. Thus, the current stock price is approximately 96% to approximately 105% of the fair value estimate.

Current valuation estimate based on P/E ratio

P/E ratio

20

21

22

Estimated value

$58.20

$61.11

$64.02

% of estimated value at current stock price

105%

100%

96%

Source: dividendpower.org Calculations

How does this result compare to other valuation models? A multiple EV/EBITDA analysis from Finbox yields a fair value estimate of $71.81 per share. The model assumes a forward multiple of 17.5X. Portfolio overview weighted fair value model combining the P/E ratio and the dividend yield yields a fair value of $68.39 per share. We don’t use the Gordon’s growth model due to the high dividend growth rate.

The average of the three models is around $67.10, which suggests that Mondelez is undervalued at the current price.

Final Thoughts

Mondelez is a stock that should be on the radar of any dividend growth investor. The company consolidates its position in the biscuit and chocolate sector through acquisitions. The company has a wide moat and develops the top and bottom lines. A growing dividend and share buybacks reward shareholders. A moderate payout ratio supports the projected dividend yield of 2.4%. The stock is undervalued at the current price. I view Mondelez as a long-term purchase.

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