2 Dividend Payers to Snack On

Erin Lash: The consumer products landscape has long offered income-hungry investors appetizing alternatives, but what names top the list at present?

For one, Campbell Soup, which trades at a 10% discount to our $45.50 fair value estimate but boasts a 3.5% dividend yield. We view Campbell’s recently inked separation from its Fresh business favorably. Further, the firm is still pursuing the sale of its international operations, which primarily consist of more desirable snacking brands that could garner a low-single-digit multiple to sales, or around $2 billion to $3 billion. Beyond reducing its leverage, we also believe that a more narrowly focused brand mix should enable Campbell to more effectively hone its resources (both financial and personnel) on the highest-return opportunities, which is essential as Campbell goes to bat against other nationally branded operators, lower-priced private-label fare, and small niche peers daily. Further, we contend that these efforts stand to support mid-single-digit annual growth in the dividend over the next decade with a payout ratio hovering around 50%, making this wide-moat name an attractive dividend play in the consumer products space.

But if soup fails to offer appeal during these warm summer months, we’d suggest investors snack on shares of Kellogg. Not only does this wide-moat operator trade at a 30% discount to our $78 valuation but also features a more than 4% dividend yield. And we don’t expect its commitment to returning excess cash to shareholders will wane. Rather, we posit Kellogg will grow its dividend at a mid-single-digit clip over the next decade, maintaining a payout ratio of just more than 50%. From our vantage point, the firm’s languishing share price reflects the fact that top-line growth has continued to prove elusive, which have lagged the modest gains of others in the space. However, we think the merits of Kellogg's strategy to move away from direct-store distribution in favor of warehouse delivery and narrowing its portfolio reach are starting to surface. In our view, funneling more-focused spending behind its snacking and cereal mix should further entrench Kellogg's operations with retailers (supporting one facet of its intangible-asset moat source) while aiding its prospects.