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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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#2
Here is a FAST Graph for K.

   

I think its a decent long term hold but the growth rate is a little slower than what I prefer. It provides a good factor of safety considering the low P/E ratio of just 12.9. I think you can reasonably expect an annual 8-10% total return based on the 2.8% yield and expected 6% earnings growth.
My website: DGI For The DIY
Also on: Facebook - Twitter - Seeking Alpha
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#3
Thanks for the graph, that's really neat. Do you recommend getting the paid-for version or would the free version suffice?
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#4
(05-06-2014, 12:18 PM)WRXodus Wrote: Thanks for the graph, that's really neat. Do you recommend getting the paid-for version or would the free version suffice?

I subscribe to the $9.95 per month version and it's been worth every penny to me. There is also a premium version but I haven't used that one so can't comment on it.
My website: DGI For The DIY
Also on: Facebook - Twitter - Seeking Alpha
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#5
I just ran K through my screen for the first time ever. While it scores a respectable 63, it is hard for me to get very excited about it.

I think I have the same reaction to K as I have to DPS. On paper, it is a fine company, but the stable of brands is not all that deep and appealing to me. I worry about the ability of these companies to grow earnings into the future at a solid pace.

Earnings growth may be picking up for K, which would make this a great time to get in, though I found their earnings reports a bit tough to decipher. Lots of adjustments and mark-to-market nonsense.

The five-year dividend growth rate is indeed between 6 and 7 percent, but had been nowhere near that the past few years. More like 3 to 4 percent. If they truly are on track to earn $4.00 or so this year, then they could give a healthier dividend raise come Q3 than the past few years, but very hard to predict.

At the end of the day, the combination of unexciting yield with unexciting dividend growth would keep me on the sidelines with this one. But if they deliver a much bigger divvy raise come Q3, and if earnings growth seem to really be accelerating, I'd give it another look.
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#6
I appreciate the input! I've been practicing the Chowder Rule to build some confidence in valuating and choosing stocks, so I'm glad that I agree with your analysis. At most, I'll keep this at 1/2 position for the time being.
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