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Kellogg's (K) with a side of Chowder
#1
Today I finally found The Chowder Rule and am trying to apply it to my investing, so I could really use some feedback to see if I'm on track with what he's saying. Thanks!

It helps me to make a step-by-step procedure, since I use SOPs all day, err'day. Here goes.

1. Check credit rating. I use Morningstar because it's what I'm most used to out of the options of MS, Value Line, and S&P Capital IQ.

--MorningStar has K at BBB+. It's the minimum credit rating recommended, but it'll do.

2. Check Fidelity StarMine. I invest with Fidelity, so that's no extra skin off my back. Chowder recommends focusing on the 2 most accurate analysts.

--K has a 8.7 (Bullish) rating, and the two most accurate are currently Ned Davis Research (92%) and EVA Dimensions (87%). NDR gives a buy rating and EVA gives a neutral rating.

3. Check that yield is 50% above the S&P yield. I guess SPY will work, whose yield is 1.85%, making the minimum satisfactory yield 2.7%.

--Yield is 2.83%

4. Calculate the overall total return. Though Chowder is trying to achieve an 8% CAGR, he shoots for 50% moat, or 12% CAGR. Chowder recommends that if the yield of a stock is between 2-3%, the 5-year dividend growth should be sufficient enough to make the overall return 15%. If the yield is >3%, the 5-year dividend growth should be sufficient to make the overall return 12%.

--Yield of 2.83% + 5-year dividend growth of 6.23% = 9.06%

5. Check for price discounts to fair value based on S&P Capital IQ. This one is weird to me for Kellogg because based on Fidelity's StarMine service, Capital IQ has 7% accuracy but I guess I'll use it here anyways.

--S&P Capital IQ fair value estimate is $66.80 and spot price is at ~1.0% discount, so K is fairly priced

6. Check that earnings have increased in 10 years. This one is subjective, and I'll try to look for companies that have increased earnings in at least 7 of the last 10 years.

--K has increased earnings 4 of the last 5 years, so for the sake of practice, I'll just extrapolate from there and say that's good enough for me right now.

7. Current P/E(TTM) vs. historical P/E. I can find numbers for the 5-year historical P/E, so that's what I'll go with.

--Current P/E is 12.50 and the 5-year historical P/E is 17.1, a 36% discount

8. Estimated earnings growth.

--P/E is expected to rise in 2014 and again in 2015 so maybe that's good enough?

Overall, I like the results of #2, 6, 7, 8. #1 and 3 are okay, but #4 and 5 are a little lacking. The 9.06% return is nothing to sneeze at, but it could use some more oomph.

That's where I'm at so far in the quest to evaluate companies. Is there anything I should add, subtract, or revise? Thanks, again!

Edit: aha! Dividend payout ratio. Should the DPR be under, say, 60%? K's DPR is at 35.25%
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Kellogg's (K) with a side of Chowder - by WRXodus - 05-06-2014, 10:26 AM



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