Mondelez International Inc (NASDAQ:MDLZ) Should Be on Your Radar Going Forward
Earlier this month, Investment U dividends expert Marc Lichtenfeld told you why to avoid Kraft Foods Group (Nasdaq:KRFT) after the news that it was splitting with its international business unit, Mondelez International (Nasdaq:MDLZ). Today, Iâ€™m going to make the case for investing in Mondelezâ€¦
Hereâ€™s the gist of the announcement, in case you missed it:
Kraft Foods, the worldâ€™s second-largest food company, recently completed its plans to spin-off its mature North American grocery business. With annual revenue of $54.4 billion in 2011, Kraft announced its plans to split into two publicly traded companies in August of last year. If you owned a share of KFT now, with the split youâ€™ll get one share in the new business for every three you previously held.
Hereâ€™s the skinny on the dealâ€¦
When the company announced last summer that it would split into two entities, the reason was to give a better value to its stockholders. It was evident that there were two distinct companies within Kraft. There was the mature North American grocery business and a global snack-food aspect.
Kraft Foods Group is the North American business and it has many popular long-standing brands like Oscar Mayer, Kool-Aid, Velveeta and Planters. The new snack-food business is now known as Mondelez International. MDLZ possesses all the dental nightmares that include high-growth products Cadbury, Oreos and Chips Ahoy.
Kraft Foods Group intends on paying out a $2 annual dividend, which would result in a yield of 4.3%. That, for the moment, is attractive because itâ€™s better than the 3% or 4% you would get from some of its popular food stock peers.
But as Marc wrote earlier this month, donâ€™t chase the fat dividend from KRFT:
â€œThe companyâ€™s payout ratio will be 79% in 2012 and 74.4% in 2013, too high to be considered safe or likely to be raised â€“ especially if the companyâ€™s brands donâ€™t get revived and earnings disappoint. The payout ratio is the percentage of earnings that are paid out in dividends. I like to se a payout ratio below 75% to feel comfortable that the dividend is safe and will probably increase.
â€œAnd with corn and other commodity prices sharply higher this year due to the drought in the Midwest, Kraftâ€™s raw materials costs should be higher, which will squeeze margins if itâ€™s unable to pass those increases on to the consumer.â€
Why Mondelez Should Be on Your Radar Going Forward
Mondelez International, on the other hand, seeks growth overseasâ€¦
Mondelez shares are trading around $28. Itâ€™s a different animal from its mature market sibling, Kraft. In my best estimation, the company should experience higher earnings growth while trading at a similar P/E ratio. Because of where they are in the business cycle, you arenâ€™t going to get the same high dividend as KRFT.
- But the following reasons are why Mondelez should be in your radar going forward:
Think about high growth potential. Mondelez gets 44% of its revenue from what we would categorize as emerging markets. Thereâ€™s also a belief in the market that Mondelez may become a credible alternative to Coca-Cola (NYSE: KO) and Colgate (NYSE: CL) in the developing world.
- Mondelez has 75% of its revenue tied to the fastest-growing products in packaged food such as gum, candy, chocolate and biscuits. Plus, the company will either have top or second market share in all of these categories.
- Credit Suisse analyst Robert Moskow places an â€œoutperformâ€ rating and a $31 price target. He has stated that we should see â€œsignificant earnings growthâ€ in two years with about $1.80 profit per share.
- Joe Cornell, principal at Chicago-based Spin-Off Research, states, â€œInternationally, we expect developing markets to drive maximum growth for Mondelez going forward. We expect developing markets to deliver double-digit revenue growth over the long term.â€
The market pundits have rendered their decision on the split. As the above evidence suggests, Mondelez seems like the stock with all the growth potential, and thatâ€™s due to the growing demand of the â€œsweet toothâ€ in both Asia and South America.