Mondelez: Double-Digit Annual Total Return Potential Could Make It A Buy Now

seekingalpha04-23

Instability in cocoa markets has pressured the share price of stocks such as Mondelez.The consumer staple delivered double-digit net revenue and adjusted EPS growth in 2023, with more solid growth on ...

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A woman relaxes outside while eating chocolate. Phoenixns/iStock via Getty Images In the stock market, money can be made by capitalizing on a favorable disconnect between market sentiment toward a stock and the fundamentals of the underlying company. This is to say that in many cases, emotions can at least temporarily cloud the judgment of market participants. When a stock is trading below its fair value, two major components can contribute to outsized total returns. For one, the starting dividend yield is higher than usual. This could potentially provide investors with both more starting and future cash flow from an investment. Not to mention that the spread between the current share price and fair value can lead to valuation multiple upside. This comes on top of any earnings growth that an investment can generate. Together, these elements can lead to the alpha that everybody here on Seeking Alpha is presumably after. Anybody paying attention to the cocoa markets in recent months knows that it has been a wild ride. Year to date, cocoa futures (CC1:COM) have nearly tripled, gaining 162%! This has weighed on consumer staples with confectioner businesses, such as Mondelez International (NASDAQ:MDLZ). In 2024, the stock is down 5% thus far. When I last covered the company in an October listicle with The Hershey Company (HSY), I appreciated its phenomenal brand portfolio, viable and growing dividend, investment-grade balance sheet, and valuation. Today, I'll be revisiting MDLZ's fundamentals and valuation to outline why I think it's still a buy here. Dividend Kings Zen Research Terminal MDLZ's 2.5% forward dividend yield comes in below the consumer staples sector median of 2.7%. This explains why Seeking Alpha's Quant System awards a C grade for forward dividend yield. Putting this uninspiring yield aside, however, MDLZ's dividend is attractive in many other ways. The company's 50% EPS payout ratio registers well below the 70% EPS payout ratio that rating agencies want to see from its industry. As I'll explain later as the article unfolds, this means the dividend is quite safe and should have the flexibility to keep compounding at a respectable rate. Better yet, MDLZ's balance sheet won't impede dividend growth, either. The company's 34% debt-to-capital ratio is roughly half of the 65% that rating agencies have as the industry-safe guideline. Along with MDLZ's industry leadership, these are a few reasons why S&P awards a BBB credit rating to the company on a stable outlook. That suggests the probability of MDLZ defaulting on debt is relatively subdued at 7.5%. For many of these same reasons, the Zen Research Terminal assigns a 0.5% dividend cut likelihood to MDLZ in the next average recession. This increases to 2% in the next severe recession. For additional substance, these are the best values possible within the Zen Research Terminal. Dividend Kings Zen Research Terminal MDLZ won't stand out as a deep-value bargain. On the other hand, though, it's certainly appealing enough to catch my attention. MDLZ's five-year average dividend yield of 2.2% could mean shares are worth $77 each. Right now, the stock faces competition from higher-yielding, lower-risk alternatives like high-yield savings accounts and CDs. As interest rates eventually start to head lower, it's sensible to expect more money to pour back into high-quality dividend growth stocks. In my view, this should lead to improved sentiment and a return to such a yield for MDLZ. MDLZ's 10-year normal P/E ratio of just above 22 per FAST Graphs may imply shares are worth $78 apiece for 2024. These fair values work out to an average 2024 fair value of $78 a share. Applying the same 10-year normal P/E ratio to the 2025 FAST Graphs adjusted EPS analyst consensus of $3.81 would give an $85 fair value. Averaging that out with the five-year average dividend yield fair value would indicate an average 2025 fair value of $81 each. Weighting these fair values for the rest of 2024 (69.2% on a weekly basis) and the start of 2025 (30.8%), that produces an average fair value of $79 apiece. From the current $69 share price (as of April 22, 2024), this would equate to a 13% discount to fair value. If MDLZ reverted to fair value and matched the growth consensus, here are the total returns that it could deliver in the coming 10 years: 2.5% yield + 8.6% FactSet Research annual growth consensus + a 1.4% annual valuation multiple expansion = 12.5% annual total return potential or a 225% 10-year cumulative total return versus the 9.8% annual total return potential of the S&P or a 155% 10-year cumulative total return A Great 2023 And A Decent 2024 Ahead MDLZ April 2024 Investor Presentation In late January, MDLZ shared encouraging operating results for the full year that ended Dec. 31, 2023. But before digging into those results, I think it's important to highlight the competitive positioning that went into these results. MDLZ is a global, truly dominant player within the consumer staples sector. Thanks to an unbelievable brand portfolio, the company has leading positions within categories that are collectively worth nearly $350 billion annually. How receptive are customers to these brands? Well, MDLZ expanded its market share in the $116 billion global biscuits category from an already leading 17.1% four years ago to an even better 17.5% in 2023. For better or worse, that means brands like Belvita, Triscuit, Ritz, and Oreo are still winning over consumers' taste buds. The same can be said for the $123 billion chocolate category, where MDLZ improved its market share from 11.9% to 12.7% in the past four years. Simply put, Cadbury eggs and chocolate bars are far from falling out of favor with consumers. MDLZ Q4 2023 Earnings Press Release MDLZ's net revenue climbed 14.4% year-over-year to top $36 billion in 2023. Responding to higher commodity prices, MDLZ implemented pricing increases that contributed to most of the topline growth - - 13.4% or 91.2% of the 14.7% organic revenue growth logged for the year. Yet, even with these higher prices, consumers were attached enough to these brands that they hardly became put off. Volumes only began to dip during the fourth quarter, but the 0.4% decline was hardly anything of major concern, with the extent of price hikes. This still allowed full-year volumes to grow by 1.3% in 2023. This was the smaller, but still key growth lever that MDLZ pulled during the year. At a time when many consumers' budgets are being stretched by price bumps of all sorts, they keep coming back to their favorite snacks and comfort foods. Many of which are included in MDLZ's brand portfolio. The company's currency-neutral adjusted EPS climbed 19% over the year-ago period to $3.32 in 2023. Aside from the higher net revenue base, MDLZ expanded its non-GAAP net profit margin by over 30 basis points to 12.6% for the year. Combined with a 1.1% reduction in the outstanding share count, this is how currency-neutral adjusted EPS growth surpassed net revenue growth during 2023. Looking at 2024, the company anticipates that it will generate net revenue growth at the high end of the 3-5% range. Paired with incremental margin expansion and additional share repurchases, this is expected to lead to high- single-digit currency-neutral adjusted EPS growth for the year. The current FAST Graphs consensus for 2025 and 2026 also shows high-single-digit annual currency-neutral adjusted EPS growth. When MDLZ shares its first-quarter earnings after market close on April 30, it will be key to watch a couple of factors. The biggest element that is on my radar is how volume holds up. Chairman and CEO Dirk Van De Put noted in his opening remarks during the Q4 2023 Earnings Call that tensions in the Middle East could continue to weigh on volume in Q1 and Q2. But beyond that point, he expects these headwinds to fade away. In North America, Mondelez thinks volumes will improve. This is because retailers building inventory in Q3 to plan for a disruption to the company's Clif bar system transition in October is now in the rearview mirror. Pricing growth should also remain positive in 2024. CFO Luca Zaramella sees pricing growth dipping from 2023, but unsurprisingly thinks chocolate will contribute to most of this pricing growth again in 2024. Due to these factors, I think that the analyst consensus for MDLZ to report $0.89 in non-GAAP EPS in Q1 is reasonable. Relative to Q1 2023, this would be flat. But as volume headwinds in the Middle East dissipate, growth in the back half of the year should compensate for first-quarter results. In viewing the interest coverage ratio for 2023, MDLZ's financial health is also promising. The company's interest coverage ratio was 20 for the year, which demonstrates that it can easily service its debt (unless stated otherwise, all details in this subhead were sourced from MDLZ's Q4 2023 Earnings Press Release and MDLZ's April 2024 Investor Presentation). Dividend Growth Isn't Slowing Down In the past five years, MDLZ's quarterly dividend per share has soared 63.5% to the current rate of $0.435 - - equivalent to a 10.3% compound annual growth rate. The most recent 10.4% raise last July is also proof that this growth isn't decelerating, either. Among the reasons why the raises keep coming in around 10% is the company's healthy free cash flows. In 2023, MDLZ posted $3.6 billion in free cash flow. Against the nearly $2.2 billion in dividends paid during the year, that works out to a 59.7% free cash flow payout ratio (info according to MDLZ's Q4 2023 Earnings Press Release). That leaves the company with the cash flows needed to repurchase shares, control the debt load, and keep the payout boosts coming. Risks To Consider MDLZ is an excellent business from my perspective, which I believe is supported by the fundamentals. However, there are risks to the investment thesis. MDLZ hedges against commodities cost changes, but there is no guarantee it won't be adversely impacted. If the company can't pass price hikes on to consumers, the profit margin could suffer. This could weigh on MDLZ's currency-neutral adjusted EPS growth at any time. Another risk to the company is the unionized nature of its workforce. In the U.S., 21% of 12,000 employees were represented by labor unions. Internationally, a staggering 55% of 79,000 employees belonged to unions (page 8 of 151 of MDLZ's 10-K filing). If MDLZ can't achieve positive outcomes in labor agreements with employees, strikes could result. That could interrupt the company's operations, which would harm operating results. Higher labor costs from such labor agreements could also crimp profits. Summary: A Top-Notch Dividend Grower Worth Buying FAST Graphs, FactSet In every important metric, MDLZ is arguably doing fine to excellent. The company's growth prospects are solid, finances are sound, and the dividend is well-supported.  Shares of MDLZ are priced moderately below the normal P/E ratio of 22 per FAST Graphs. If the stock can return to this multiple and grow as expected, 40%+ cumulative total returns could be in store through 2026. 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