Erin Lash: With the holidays in full swing, it seems that everywhere you turn, sweets abound. But for income investors looking to satisfy their sweet tooth, which is the better option: Mondelez or Hershey?
While Mondelez shares trade at a more than 10% discount to our $52 fair value estimate, we don't believe its top priority for cash will center on boosting the income stream paid to shareholders. In this vein, we forecast Mondelez will increase its shareholder dividend in the high single-digit range on average annually through fiscal 2027, but this implies a payout ratio of only around 40%. Rather, we surmise that despite remaining on the sidelines for the better part of the last few years, the firm's prime use of cash will be to invest behind its brands (in the form of research, development, and marketing) as well as acting as a consolidator in the space, with an eye toward expanding its footprint into untapped markets--such as Indonesia and Germany--or other adjacent snacking categories.
However, we view this spend as prudent as it works to profitably reignite its top line by extending the distribution of its fare and more effectively aligning its new products with evolving consumer trends around the world. And because of its entrenched retail relationships, the resources it invests behind its leading brand mix, and expansive global scale, we believe Mondelez is poised to withstand lingering competitive headwinds longer term. But with a yield of just around 2%, we don't portend that this wide-moat name will be viewed as favorably with income investors as its packaged food peers.
As such, we think the more attractive dividend play in the snacking and confectionery aisle is Hershey. Even though Hershey has opted to pursue a handful of inorganic growth opportunities over the past few years (including poaching Amplify and Pirate Brandsk most recently), we don't posit it will deviate from the capital allocation prudence it has exhibited in the past. Our contention hinges on the sizable ownership stake of the Milton Hershey School Trust, which maintains more than 80% voting power, given the Hershey School depends on the firm's dividends to fund its operations.
In this context, we forecast Hershey will also grow its dividend at a high single-digit clip on average annually over the next decade but that it will maintain a dividend payout ratio of just more than 50%. Further, we believe its dominance in the U.S. confectionery space (where it holds about 45% share of the chocolate category versus just a 1% share for private label) and continued investments to bolster its brand mix and standing with retailers should ensure that it withstands intense competitive and macro pressures. Trading at nearly a 10% discount to our $117 fair value estimate, and boasting a dividend yield of just under 3%, we think income investors could find favor with Hershey's shares.