Where’s the beef?

Or the Thanksgiving turkey, for that matter. Margaret Samuel explores the world of plant-based food and finds three attractive dividend stocks to buy.

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Had so much Thanksgiving turkey that you’re ready to commit to plant-based food? Here are three stocks that should make for a “good accompaniment” to your new diet.

Veganism has existed for millennia as a diet and lifestyle, but it’s only recently that it has become big business. Indeed, Matthew Glover, managing director of Veg Capital, declares that there “have never been so many options when it comes to eating plant-based food—and the sector’s success is exactly what’s piqued the interest of investors.”

For example, in the last two years, Los Angeles-based Beyond Meat heralded the dawn of the plant-based food era with its IPO, Burger King teamed up with Impossible Foods to launch the Impossible Whopper, Taco Bell announced plans to test a menu item made with the meat substitute offered by Beyond Meat, and McDonald’s developed the basis for a line of vegetarian products with its new plant-based platform.

“A change toward a plant-based diet appears inevitable, in our view, if the global food system is to become more sustainable,” states Eugene Klerk, report author and Managing Director of Credit Suisse’s Securities Research Division. For example, Klerk continues, “Diets associated with a sustainable world call for a decline in milk consumption in order to meet longer-term climate change and health targets.”

This article features three potential investments that provide varying levels of exposure to the vegan sector that may be attractive to investors who prefer to earn dividends.

Ingredion Incorporated (NYSE—INGR)

One plant-based-food stock that has garnered a lot of investor attention and that pays a dividend is Ingredion Incorporated. Ingredion had net sales of $6 billion in 2020. It is a leading global-ingredient solutions provider that turns grains, fruits, vegetables and other plant-based materials such as corn, tapioca, potatoes and other vegetables and fruits into ingredient solutions for the food, beverage, animal nutrition, brewing and industrial markets.

INGR services customers in more than 120 countries and its sales are generated in four regions: North America (61 per cent), South America (15 per cent), Asia Pacific (14 per cent) and Europe, Middle East and Africa (10 per cent). Its platforms consist of Starch-Based Texturizers, Clean and Simple Ingredients, Plant-Based Proteins, Sugar Reduction and Specialty Sweeteners, and Food Systems.

Ingredion probably would not qualify as a value stock in most investors’ minds with a PEG ratio of 7.33 and a Price to Book ratio of 2.01.

In addition, while INGR’s payout ratio of 124.27 per cent suggests that its dividend distribution of 3 per cent may be a bit aggressive, its positive second-quarter performance suggests that its dividend indeed may be sustainable. In its second quarter earnings call, President, CEO and Director James P. Zallie summarized the company’s positive performance and outlook: “We delivered exceptional second quarter performance, demonstrating the strength and breadth of our customer base and the resiliency of consumer demand for the range of food products that use our ingredients. In every region, we saw double-digit growth from demand recovery across all customer segments as well as very strong specialties growth. Our strong sales execution and price management in the face of robust and fluctuating demand contributed to our 31 per cent net sales growth. Adjusted operating income for the quarter was up 64 per cent versus prior year and marks our strongest quarter since 2017.”

The Kroger Co. (NYSE—KR)

Major grocery store chains such as The Kroger Co. have been prompted to expand plant-based food offerings because of the shift in consumer preferences toward meatless options.

With 2020 total sales of $132.5 billion, and 45 distribution centres, 500,000 associates, 2,700 supermarkets and multi-department stores and 1,600 supermarket fuel centres, KR is one of the world’s largest food retailers. On June 24, 2021, KR’s Chairman and Chief Executive Officer, W. Rodney McMullen, stated that Kroger’s “focus on fresh, organic, and better-for-you products contributes to improved health and nutrition, fulfills our purpose to feed the human spirit, and drives growing demand. Our Simple Truth collection is the leading private-label natural and organic brand in the United States. Last year alone it exceeded $3 billion in annual sales.”

Indeed, according to reporter Melissa Pistilli: “In late 2020, Kroger added 50 plant-based products to its Simple Truth brand, including non-dairy cheese, oat milk ice cream and a plant-based alternative to chicken. The product line already featured meatless burger patties and sausages, non-dairy sour cream and cookie dough ice cream. The grocery store chain also carries plant-based food brands including Beyond Meat, Lightlife and Tofurkey.”

With a dividend yielding about 2 per cent, Mr. McMullen stated on June 24 that Kroger has declared a 16.7 per cent increase in its dividend, which is somewhat greater than the historical growth rate, and which highlights Kroger’s confidence in its long-term model. “This is Kroger’s 15th consecutive year of a dividend increase,” Mr. McMullen stated. Indeed, with a healthy dividend payout ratio of 36.27 per cent, Kroger appears to be paying a dividend that is sustainable.

Profitability appears solid, with a Profit Margin of 1.14 per cent, Return on Assets of 3.46 per cent and an ROE of 16.37 per cent. Mr. McMullen states that KR is increasing its full year guidance: “Based on the momentum within our business . . . we now expect our two-year identical sales stack to be in the range of 10.1 per cent to 11.6 per cent. Additionally, our new $1 billion-share-buyback program reinforces our board of directors’ and management’s confidence in our ability to generate strong free cash flow. It is also consistent with our commitment to deliver strong and sustainable total shareholder returns of 8 to 11 per cent.” The company’s positive outlook is reflected in the stock’s share price, which is making new highs.

While gaining exposure to a major retailer that is increasingly addressing the vegan market, investors in Kroger can expect to enjoy continuing positive share-price performance derived from strong underlying sales and dividend payouts. Although investors may prefer to wait for a pullback in the stock before purchasing shares, Kroger’s valuation is reasonable, with a PEG ratio of 1.25, and a Price-to-Book ratio of 3.39. In addition, the price has historically been less volatile than the market with a beta of .36, suggesting that investors may feel comfortable enough to sleep at night with this stock in their portfolio. This reasonable valuation, considered in light of the positive outlook and achievement of new stock price highs, suggests that initiating a position now with a view to increasing exposure on any pullback may be warranted.

The Kellogg Company (NYSE—K)

With $13.94 billion in sales, The Kellogg Company is a food industry colossus that manufactures and markets ready-to-eat cereal and convenience foods. Its website declares that it is “one of the original plant-based well-being companies.” Indeed, Kellogg’s food portfolio, which includes its cereals, snacks and meat alternatives brand is 86 percent plant-based.

Its segments include US Morning Foods (cereal, toaster pastries, health and wellness bars, and beverages); US Snacks (which includes cookies, crackers, cereal bars, savory snacks and fruit-flavored snacks); US Specialty (which represents food away from home channels, including food service, convenience, vending, Girl Scouts and food manufacturing); North America Other (which includes the US Frozen, Kashi and Canada operating segments); Europe; Latin America; and Asia Pacific.

Kellogg’s dividend, yielding approximately 3.74 per cent appears sustainable, with a conservative payout ratio of 61.79.

Profitability appears solid with return on assets of about 6.53 per cent, and return on equity of 37.42 per cent. Indeed, on August 5, 2021, in announcing Kellogg’s second quarter results, Chairman and Chief Executive Officer Steve Cahillane highlighted Kellogg’s organic net sales growth of 5 per cent on a 2-year CAGR basis, gross profit margin ahead of 2019, operating profit growth of 8 per cent, on a 2-year CAGR basis excluding divested businesses, and stronger-than-expected year-to-date cash flow of $386 million. Kellogg’s Chief Financial Officer, Amit Banati, also stated that Kellogg’s is raising its guidance for 2021 net sales to almost 3 per cent on a 2-year CAGR to reflect business momentum. While operating profit is projected to decline by 1 to 2 per cent in 2021 due to increasing costs, Earnings per Share is forecast to increase 1 to 2 per cent, and the company’s expectation for cash flow remains at $1.1 to 1.2 billion for the year.

On a valuation basis, Kellogg’s may seem a bit high with a PEG ratio of 4.89 and a price to book ratio of 6.78. Thus, investors may wish to wait for a price pullback before purchasing the company’s shares. However, Mr. Cahillane highlights reasons for optimism, including “underlying momentum driven by the biggest brands, capacity unlocking incremental capacity, emerging markets sustaining strong growth, enhanced capabilities leveraging for better execution, strengthened balance sheet-enabling increased cash returned to shareholders, balanced financial delivery continued in Q2, and affirmed outlook sales momentum offsetting high costs.” With less volatility than the market, as measured by its Beta of .66, and trading around its 200 day moving average, this may be a stock worth purchasing to gain long-term exposure to the plant-based food market.

Margaret Samuel, MBA, LL.B., CFA is President, CEO and Portfolio Manager of Enriched Investing Incorporated. She can be contacted at info@enrichedinvesting.com. She or clients of Enriched Investing™ may hold positions in the securities mentioned. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only. It may also contain forward-looking statements that may not prove to be accurate. Every effort has been made to compile this material from reliable sources; however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.

This is an edited version of an article that was originally published for subscribers in the September 2021, First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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