For our purposes, that “crystal ball” is composed of a few factors: namely a solid balance sheet, a low payout ratio, and a history of dividend hikes. While those items don’t guarantee dividend announcements in the next month or two, they do dramatically increase the odds that management will hike their cash payouts, especially as investors start to get antsy about stock performance in 2012.
Without further ado, here’s a look at five food stocks that could be about to increase their dividend payments in the next quarter.
First up this week is cereal giant Kellogg. This $18 billion firm owns some of the best-selling cereal brands in Americans’ pantries — and at the same time, it has built up its convenience food brand portfolio to include household names such as Keebler, Ego, and Morningstar Farms. Embracing convenience food trends and international growth should lead to increased shareholder returns for Kellogg in 2012.
Kellogg has done a good job of innovating in the last few years, digging an economic moat around brands like Special K, and developing new non-cereal offerings that increase the revenues that the firm collects from its best customers. The firm’s decision to acquire the Pringles brand should do a good job of diversifying Kellogg’s offerings into the chip aisle of grocery stores.
At the same time, Kellogg has slowly been making more traditional inroads into emerging markets. At present, the firm generates around a third of its sales overseas, leaving plenty of room for that number to grow in the long-term. While neglected emerging market tastes has been a conspicuous shortfall on Kellogg’s top line, the firm is putting more efforts into selling its wares in growth economies this year.
Kellogg has paid out a quarterly 43 cent per share dividend for the past three quarters — that’s a 3.4 percent yield at current levels. With a payout ratio that’s lagging Kellogg’s cash generation, investors should be in store for a dividend hike.
HJ. Heinz is another firm that’s focusing on emerging market growth in 2012. The condiment giant may be best known for its namesake ketchup brand, but it also produces everything from soup and baby food to Ore-Ida frozen French fries.
Still, the Heinz brand adds some serious power to the firm’s top line — alone, it’s around 40 percent of sales. All of those little free ketchup packets at fast food restaurants make up a whopping 15 percent of Heinz’s $10 billion in annual revenue.
This firm is significantly less U.S.-centric than Kellogg — right now, more than 60 percent of Heinz’s sales come from abroad. Of that, 20 percent is earned in emerging markets. That entrenchment in growth markets is especially attractive as consumers start earning more, after all, food is generally the first thing that gets upgraded as people move up into the middle class.
Like other food producers, Heinz has been pressured by increasing input costs as inflation worked its way into cost of goods sold on the income statement. Still, the earnings impact of those rising costs has been a lot less than Wall Street’s expectations — and with commodity prices cooling off in 2012, a major margin squeeze isn’t a huge concern.
Heinz pays out a quarterly 48 cent per share dividend, a payout that currently yields 3.51 percent. Heinz has been paying out that same dividend for the last four quarters — now I think investors should be anticipating a modest hike in the payout. We’ll see if I’m right when the firm announces its earnings on May 24.
3. J.M. Smucker
Acquisitions have been J.M. Smucker path to growth for the past few years — the peanut butter and jelly firm made a major buy when it acquired the Folgers brand in 2008, transforming its operations to absorb the coffee giant. And now, in 2012, Smucker is dipping its toe in the Chinese market with an investment in an oat manufactuerer in the People's Republic. While the company’s foray into China isn’t material yet, it’s an important first step toward bringing over the firm’s massive portfolio of brands to the Chinese market.
Smucker’s market share dominance means that the firm is able to command the best positioning in its categories on grocery shelves, and it can also command favorable terms when it works out pricing with those grocers. The result is net margins that typically ring in just shy of double-digits and plenty of cash generation.
Because of the company’s hefty exposure to coffee, which trades directly in the commodity pits, the firm suffers when commodity prices are strong. With coffee’s sharp pullback from early 2012 highs, Smucker’s should get some extra room in its bottom line.
After four quarters with its quarterly dividend payout at 48 cents per share, Smucker’s shareholders are due for a rate hike. After all, the company targets a payout ratio of 40 percent. That should increase the 2.48 percent yield that investors are currently earning on shares.
4. Darden Restaurants
It’s been a good year for shares of Darden Restaurants; the $6.7 billion dining stock has seen its shares rally by more than 13.5 percent since the first trading day in January. Now, a possible dividend hike could add a heftier cash payout onto those capital gains.
Darden owns full-service restaurant chains like Red Lobster, Olive Garden, and LongHorn Steakhouse — more than 1,800 North American locations in all. It’s the sole name on this list of food-centric stocks that isn’t a manufacturer — and the casual dining firm that’s best been able to succeed in this challenging economic environment.
One key to Darden’s success has been its willingness to step into new dining concepts; the acquisition of higher-end Capital Grille and the new healthier Seasons 52 brand are two examples of how Darden isn’t just diversifying cuisine to achieve growth. And in spite of the consumer spending crunch that hamstrung rivals during the recession , top-line growth is exactly what Darden turned out.
Currently, Darden pays a 43 cent dividend each quarter — a 3.32 percent yield at current levels. I’m expecting that number to increase in the next quarter.
5. Molson Coors Brewing
Last up is Molson Coors Brewing, not a food stock per se, no matter what beer enthusiasts may say about the firm’s Granville Killarney Stout. But Molson ebbs and flows from the same forces that impact food processing names, and it’s another firm that I see hiking its dividend payout in the next quarter. Currently, Molson yields 3.2 percent.
Molson is one of the largest beer brewers in the world, with brands that include the eponymous Molson and Coors, as well as Blue Moon, Keystone, and Miller Lite (the latter through a joint venture with SABMiller here in the U.S.). While the firm has had some issues with currency translation costs (it earns significant revenues abroad, which have to be converted to dollars for financial reporting), a weaker dollar scenario in the future points to higher quality earnings for Molson.
Investors should anticipate hearing the next word on dividends from Molson by the firm’s second-quarter earnings call on Aug. 7. That’s when I expect they’ll hike their 32-cent quarterly payout.
—By Jonas Elmerraji, Contributor, TheStreet.com
Additional News: Kellogg Cuts 2012 Outlook, Shares Sink
Additional Views: Despite Olive Garden Sales Boost, Darden Isn’t a ‘Buy’: Analyst
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TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks. Disclosure information was unavailable for Jonas Elmerraji.