Every time I consider Mondelez Worldwide (NASDAQ:MDLZ), I consider the final time I ate manner too many Oreos. Nevertheless, it additionally makes me consider the most effective client defensive shares in the marketplace – possibly THE greatest?
Not solely does the corporate include a 2.4% dividend yield and a terrific dividend observe file, however its inventory value has became an outperformer.
Basically, client staples are in a troublesome place. Inflation is rising once more, placing large stress on the buyer, particularly in gentle of rapidly deteriorating financial savings.
The underside 80% of households have utterly depleted their pandemic financial savings.
When including that inflation is rising once more, we’re coping with a really delicate scenario.
Most client staples had pricing energy when the pandemic began. Nevertheless, two years after the beginning of upper inflation, the scenario has modified.
Over the previous 12 months, the Client Staples ETF (XLP) has returned simply 2.5%, together with dividends. The S&P 500 has returned 19% throughout this era.
Then there’s Mondelez Worldwide. The corporate has outperformed even the S&P 500, which benefited tremendously from its elevated tech publicity over the previous two quarters.
Mondelez is doing all the things proper.
As we’ll talk about on this article, the corporate is specializing in the precise merchandise, selling its greatest sellers, increasing into sturdy markets, and enhancing its margins.
Within the second quarter, the corporate noticed huge value hikes. Nevertheless, its volumes did not endure, which in itself is spectacular. The corporate hiked its steering and remained upbeat about its future regardless of a variety of headwinds, together with inflation and geopolitical dangers.
So, on this article, we’ll talk about all of this and assess the danger/reward of shopping for what could very effectively be one of the best (or the most effective) client staples in the marketplace proper now.
Mondelez is Firing On All Cylinders
Let’s begin this text by looking again on the firm’s earnings within the first two quarters of this yr, which revealed so much concerning the firm’s strengths.
Within the first half of 2023, MDLZ achieved spectacular monetary outcomes.
Wanting on the desk under, we see that rising markets noticed 23.3% natural income progress. Developed nations noticed 11.2% natural progress.
Moreover, what actually impressed me is that the corporate’s pricing didn’t result in decrease volumes. Complete pricing was up 15.8%, which is a quantity we do not see in durations with out elevated inflation.
Complete volumes have been unchanged, which exhibits the corporate’s sturdy pricing energy. Virtually each single client staple firm is combating declining volumes, as larger pricing is pushing shoppers to generic manufacturers and towards much less consumption.
In developed markets, the corporate noticed a 1.2 factors decline in volumes, greater than offset by 2.1 factors progress in rising markets – regardless of 21.2% larger costs!
Adjusted gross revenue greenback progress exceeded $1 billion, which is an 18.9% improve in comparison with the earlier yr. This distinctive monetary efficiency was attributed to the corporate’s sturdy give attention to value administration and its capability to regulate pricing to counteract inflationary pressures.
The corporate’s success is predicated on a variety of components.
Throughout its 2Q23 earnings name, the corporate emphasised its investments in digital commerce and income progress administration instruments to assist manufacturers and improve partnerships with prospects.
They said that they achieved the primary market share place in digital commerce of their high 5 markets – america, China, the UK, France, and Brazil.
Moreover, rising markets like India, the Philippines, Brazil, Mexico, and Poland confirmed a 40% year-to-date progress.
As a way to keep sturdy momentum, the main target is on accelerating eB2B capabilities to increase distribution and fortify partnerships with key prospects.
The corporate additionally expressed confidence within the resilience of client consumption, model reinvestments, and the completion of pricing methods, which is one thing most opponents are doubtless jealous of.
Additionally, primarily based on the strong first-half efficiency and a optimistic outlook throughout companies, MDLZ raised its expectations for the yr. The corporate now anticipates a top-line progress of not less than 12%, a considerable improve from their authentic outlook of 5% to 7%, and even surpassing the newest outlook of greater than 10% progress.
In response to the corporate (emphasis added):
The outlook revision displays our elevated confidence within the yr. Ongoing resilience of client consumption in our classes, comparatively benign elasticities, continued model reinvestments, and completion of pricing in Europe in addition to well being of our rising markets. This present outlook doesn’t take into account a cloth deterioration of geopolitical atmosphere surrounding some areas of our enterprise. – MDLZ 2Q23 Earnings Name
In different phrases, the corporate has the precise merchandise, catering to sturdy markets that permit it to hike costs when it issues most.
This was reiterated at this month’s annual Barclays International Client Staples Convention, the place the corporate emphasised the energy of client consumption of their key classes, which embrace chocolate and biscuits/baked snacks.
Regardless of challenges, the sentiment amongst shoppers appeared optimistic, with Europe, the U.S., and rising markets all displaying optimistic attitudes.
Promotional stress and private-label market share modifications are minimal, with personal labels accounting for about 10% within the biscuits phase and a 0.2% improve within the 5% share of private-label chocolate.
The corporate additionally commented on inflation. Sugar inflation, for instance, is a matter as costs have skyrocketed.
Whereas value will increase have been important, Mondelez has hedged successfully, securing favorable costs for many commodities by 2023.
The corporate intends to regulate pricing in a manner that minimizes the affect on shoppers and retailers, with a give attention to pricing at substitute value.
Particular consideration will likely be given to defending value factors in rising markets, the place low-priced merchandise play a vital function in attracting shoppers.
Additionally, with regard to my rising market feedback, the corporate highlighted the success of Mondelez in rising markets in the course of the convention, which is pushed by improved distribution, localized promoting, and widespread manufacturers like Oreo.
The corporate continues to increase into third-tier cities in China and has made strategic acquisitions, like Ricolino in Mexico, to enhance its market share.
Mondelez goals to double the variety of shops in China and constantly add new SKUs to increase its product choices.
Talking of increasing and Oreo, the corporate’s Oreo model has a ten% market share within the U.S. Now, the corporate goals to duplicate this success worldwide.
By improvements, licensing, and strategic partnerships like Oreo merchandise in ice cream, Mondelez goals to determine Oreo as a dominant world model. In 2022, Oreo generated $4 billion in income, and it is projected to succeed in $5 billion subsequent yr.
With regard to exterior progress, the corporate is dedicated to preserving its capital construction whereas pursuing progress alternatives. Mondelez believes that acquisitions are the best way ahead and is actively potential takeovers globally.
Nevertheless, the corporate goals to remain nimble and keep away from overextending in areas the place acquisitions are already underway, akin to Mexico and the U.S.
Mondelez’s precedence is natural progress, and any potential acquisitions will likely be evaluated fastidiously to optimize the stability sheet.
Talking of stability sheet well being, the corporate is predicted to take care of roughly $19.5 billion in internet debt, which interprets to roughly 2.8x EBITDA.
MDLZ has an investment-grade BBB credit standing.
This brings me to the subsequent a part of this text.
Spectacular Complete Return & Shareholder Distributions
Due to sturdy natural progress, a wholesome stability sheet, and the idea that its profitable technique will proceed to bear fruit sooner or later, the corporate has a terrific observe file on the subject of rewarding shareholders.
We additionally introduced immediately a rise in our dividends of plus 10%, marking a double-digit improve in eight of the final 9 years of the historical past of Mondelez. – MDLZ 2Q23 Earnings Name
MDLZ at present pays $0.425 per share per quarter. This interprets to a yield of two.4%. This yield is under the sector median of two.7%. It is the one purpose why the corporate’s dividend scorecard has one dangerous grade, which I believe we are able to ignore – until traders rely upon excessive revenue from their investments.
All different grades are nice. The corporate has a wholesome sub-50% payout ratio of lower than 50% and a five-year common annual dividend progress fee of 11.8%.
Throughout the Nice Monetary Disaster, the corporate stored its dividend unchanged.
It didn’t lower its dividend in 2012. Again then, it spun off the Kraft Meals Group.
Wanting on the chart under, we see that analysts count on the corporate to finish up with a 4.5% free money circulation yield in 2024. That is primarily based on its present market cap.
This quantity implies a 53% money dividend payout. After 2024, free money circulation progress is predicted to stay in double-digit territory, indicating a possible continuation of long-term double-digit dividend progress.
The corporate has additionally constantly purchased again inventory. Over the previous ten years, the corporate has purchased again 24% of its inventory.
Because of constant progress, a wholesome stability sheet, and really engaging shareholder distributions, MDLZ shares have returned near 170% over the previous ten years, beating the aforementioned XLP ETF by a major margin.
It did not beat the S&P 500 throughout this era, which is especially a results of the post-pandemic energy in tech shares.
So, what concerning the valuation?
Traditionally talking, MDLZ shares have traded near 17-18x EBITDA, which is consistent with what I prefer to name the gang of greatness of client staples, which incorporates PepsiCo (PEP), The Hershey Firm (HSY), and Procter & Gamble (PG).
All of those corporations have one factor in frequent: nice manufacturers with sturdy pricing energy.
Utilizing a 17x a number of, I get a good worth of $80 per share, which is 14% above the present value. That is primarily based on $7.8 billion in anticipated 2025E EBITDA. Analysts count on annual EBITDA progress to stay within the mid-single-digit vary, which I consider is a good assumption.
The present consensus value goal is $83, barely above my goal.
In different phrases, so much has been priced in already, which is why I began this text by displaying the corporate’s stellar efficiency.
So, here is how I’d cope with MDLZ if I have been searching for extra client staples publicity.
- I’d put MDLZ on my watchlist to attend for a 5% to 10% pullback. This may increasingly occur if inflation stays sticky and traders begin to turn out to be extra scared of what might be an unsightly mixture of weaker financial progress and sticky inflation (elevated charges).
- Shopping for MDLZ at present costs. Nevertheless, I’d do it step by step. If the inventory drops, traders can common down (get a greater valuation and better yield). If the inventory takes off, traders have a foot within the door.
No matter my medium-term expectations, the corporate is in an incredible spot to maintain outperforming its friends, as I consider that MDLZ is likely one of the greatest defensive shares in the marketplace.
Mondelez stands out as a top-tier client staple inventory, displaying a robust efficiency and resilience within the face of financial challenges.
With a stable 2.4% dividend yield, spectacular income progress, and strategic market growth, MDLZ outperforms its friends and the S&P 500 regardless of rising inflation.
The corporate’s capability to take care of pricing energy with out compromising volumes is noteworthy, whereas leveraging digital commerce and strategic partnerships, particularly in rising markets, has propelled MDLZ’s progress.
The corporate’s dedication to preserving a wholesome stability sheet, rewarding shareholders, and pursuing natural progress paves the best way for long-term good points.
I count on the inventory to stay an outperformer in its sector and an incredible supply for accelerating shareholder distributions.