Top picks 2013: Kellogg

Here's a top pick for the breakfast table or your long-term portfolio.

By TheStockAdvisors Jan 3, 2013 11:25AM
Girl grocery shopping with her mother image100 SuperStock By Jim Stack, InvesTech Market Analyst

Kellogg (K), our top conservative idea for 2013, is the world's leading producer of cereal and, with the May 31 acquisition of Pringles ($1.5 billion in sales), it became the world's second largest player in savory snacks.

Founded in 1906, the company has become a global giant that maintains manufacturing facilities in 18 countries and sells its products in 180 countries.

Although Kellogg is already arguably the best known brand in breakfast products, the firm continues to focus on innovation and brand building where it spends more, as a percentage of sales, than any other company in its peer group.  Consequently, new products last year accounted for over $800 million in sales.

Strategic acquisitions also provide an avenue to future growth. The recent Pringles addition tripled Kellogg's international snacks operations and management recently stated that so far Pringles has exceeded expectations. The deal also opens avenues for the company to further expand its global platform.

Despite this $2.7 billion acquisition, Kellogg's finances remain on firm footing. The firm's return-on-equity, which measures its profit generating efficiency, is greater than 50%, more than double the industry median of 23%. Expectations are that earnings will grow at a healthy 7% to 9% annual rate for the next three to five years.

Also, this stock should be particularly attractive to conservative income-oriented investors as it offers an attractive 3.1% dividend yield, a dividend that has grown at an average rate of 7% annually over the last eight years.

Moreover, as a member of the Consumer Staples sector, the stock is typically more resilient in the event of a market downturn.

From a valuation standpoint, companies like this are rarely a bargain. However, Kellogg is currently selling at a price-to-sales ratio of 1.5, which is below its 10-year median of 1.7.

This discount, together with the stimulus provided by the Pringles addition, should make Kellogg an attractive addition to any value-oriented portfolio.

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