These three leading foodmakers continue to struggle as consumers switch to more healthful alternatives. In response, each company has focused on developing new products with less salt and sugar.
It will likely take some time for these moves to shore up their sales. Meantime, an aggressive cost-cutting plan gives each of the three producers more cash for dividends and share buybacks.
KRAFT HEINZ CO. $85 (Nasdaq symbol KHC; Income Portfolio, Consumer sector; Shares outstanding: 1.2 billion; Market cap: $102.0 billion; Price-to-sales ratio: 4.2; Dividend yield: 2.9%; TSINetwork Rating: Above Average; www.kraftheinzcompany.com) makes condiments and sauces (such as Heinz Ketchup). Its other packaged foods include Velveeta and Philadelphia Cream Cheese, processed meats (such as Oscar Meyer hot dogs) and beverages (such as Maxwell House coffee).
Kraft Heinz took its current form in July 2015, with the merger of Kraft Foods Group and H.J. Heinz. Today’s firm is the world’s fifth-largest food and beverage producer.
In the three months ended July 1, 2017, sales fell 1.7%, to $6.7 billion from $6.8 billion a year earlier. If you adjust for exchange rates and the impact of businesses the company bought and sold, sales declined 0.9%. Special promotions in North America and Europe reduced average prices for its products by 0.4%. At the same time, lower demand for cheese and meats in the U.S. cut volumes by 0.5%.
Kraft Heinz earned $1.2 billion, or $0.94 a share, in the quarter. That’s up 50.5% from $770 million, or $0.63.
The company continues to cut costs following the merger. Those moves, including the closure of plants, should lower its annual expenses by $1.7 billion, starting in 2018.
If you disregard all unusual items, earnings per share in the latest quarter rose 15.3%, to $0.98 from $0.85.
As of July 1, 2017, Kraft Heinz held cash of $1.45 billion. Its long-term debt of $30.0 billion is a moderate 29% of its market cap.
The company’s strong balance sheet will help it develop more healthful products. Kraft Heinz also expects a new alliance with TV personality Oprah Winfrey to spur its sales. Under that deal, the partners will launch a new line of refrigerated soups and side dishes under the “O, That’s Good” label. Those products will contain no artificial flavours or colouring, and 10% of the profit will go to charities working to reduce hunger.
The stock trades at a high 23.4 times the $3.64 a share the company will probably earn in 2017. Kraft Heinz will also raise its quarterly dividend by 4.2%, to $0.625 a share from $0.60. The new annual rate of $2.50 yields 2.9%.
Kraft Heinz is a hold.
MONDELEZ INTERNATIONAL INC. $43 (Nasdaq symbol MDLZ; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.5 billion; Market cap: $64.5 billion; Price-to-sales ratio: 2.5; Dividend yield: 2.0%; TSINetwork Rating: Above Average; www.mondelezinternational. com) makes cookies and crackers (Oreo, Chips Ahoy!, Ritz), chocolate bars (Cadbury, Toblerone), gum and candy (Trident, Chiclets) and Halls cough drops.
In the second quarter of 2017, Mondelez’s sales fell 5.0%, to $6.0 billion from $6.3 billion a year earlier. If you exclude currency rates and the impact of a malware attack that disrupted its computer systems in June 2017, sales declined 2.7%.
Earnings in the quarter gained 10.5%, to $744 million from $673 million. Due to fewer shares outstanding, pershare earnings rose 11.6%, to $0.48 from $0.43.
The higher earnings are mainly because Mondelez continues to make progress with its cost-cutting plan. This involves closing older plants and boosting efficiency. The company aims to lift its operating margin (operating income divided by revenue) to between 17% and 18% by 2018. It was 15.8% in the second quarter.
As of June 30, 2017, Mondelez held cash of $1.4 billion. Its long-term debt of $13.2 billion is just 20% of its market cap.
The company will probably earn $2.12 a share for all of 2017, and the stock trades at 20.3 times that estimate. Mondelez has also raised its quarterly dividend by 15.8%, to $0.22 a share from $0.19. The new annual rate of $0.88 yields 2.0%.
Mondelez International is a hold.
GENERAL MILLS INC. $58(New York symbol GIS; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 577.1 million; Market cap: $33.5 billion; Price-to-sales ratio: 2.1; Dividend yield: 3.4%; www.generalmills.com) is one of the world’s largest food makers. Its top brands include Big G (cereal), Green Giant (canned and frozen vegetables), Pillsbury (baking dough), Old El Paso (tacos), Progresso (soups and salads) and Yoplait (yogurt).
In the fiscal year ended May 26, 2017, General Mills earned $1.66 billion, down 2.4% from $1.70 billion in 2016. Due to fewer shares outstanding, earnings pershare were unchanged at $2.77. If you disregard unusual items, including costs to restructure its operations, General Mills earned $3.08 a share in 2017. That’s up 5.5% from $2.92 in 2016.
The company expects the restructuring will cut $700 million from its annual expenses starting in 2018. That’s up from its year-earlier forecast of $540 million.
Sales in fiscal 2017 fell 5.7%, to $15.6 billion from $16.6 billion. The drop was mainly due to weak demand for yogurt, mostly in the U.S. General Mills now aims to spur its yogurt sales with a new line of French-style yogurt called “Oui.”
For all of fiscal 2018, the company expects its overall sales will decline between 1% and 2%. However, savings from its restructuring plan should increase its earnings by around 1.5%, to $3.13 a share. The stock trades at a somewhat high 18.5 times that forecast.
Despite the weak outlook, General Mills has increased its quarterly dividend by 2.1% to $0.49 a share from $0.48. The new annual rate of $1.96 yields 3.4%.
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