Kellogg Plans to Split Into Three Companies; Payout Expected to be Maintained in Aggregate

Kellogg has announced plans to split into three independent companies, believing that separating its operating segments will provide better autonomy and room for growth while helping its rangebound stock price break higher as investors value each business separately.

While details still need to be finalized, including board approval and a favorable ruling from the IRS, the tax-free spinoffs are expected to occur by the end of 2023.

Management has reiterated its commitment to the dividend and plans to keep income investors whole in the aggregate, with each emerging company assuming responsibility for part of the payout. As such, we are maintaining Kellogg's Safe Dividend Safety Score.

Despite the dividend's safety, investors should consider the varying long-term outlooks of each of the three companies to decide if they are appropriate for their investment strategy.

The surviving entity, temporarily called "Global Snacking Co.," will retain the company's snack brands, international cereal and noodles operations, and North American frozen breakfast foods, collectively accounting for nearly 90% of last year's earnings.

Snack foods and international markets are expected to be solid growth drivers in the years ahead, led by popular brands such as Pringles, Cheez-It, Pop-Tarts, Rice Krispies Treats, Nutri-Grain, and RXBAR.
Source: Kellogg Investor Presentation
Management hopes this curated portfolio of popular brands will trigger more consistent and stronger earnings growth.

However, we expect "Global Snacking Co." to have a lower dividend yield, likely under 3%, as the surviving company prioritizes advertising to increase brand awareness internationally. That said, with more earnings upside, the dividend will likely experience the most growth in the years ahead among the three companies.

The two companies to be spun-off are provisionally referred to as "North America Cereal Co." and "Plant Co." 

"North America Cereal Co.," as its name suggests, will primarily sell ready-to-eat cereals like Raisin Bran and Froot Loops to American, Canadian and Caribbean consumers. This business accounted for a little over 10% of Kellogg's 2021 earnings.
Source: Kellogg Investor Presentation
Although these are well-established brands, they are sold in a mature and saturated market with little growth potential, especially as households increasingly opt for more convenient and healthier breakfast offerings such as yogurt and snack bars.

As such, "North America Cereal Co." is unlikely to grow earnings materially. However, the company should generate stable cash flow and pay a reliable dividend with the highest yield of the three companies, probably in the range of 3% to 5%.

The last company to be spun will be "Plant Co.," a plant-based foods business that accounted for less than 5% of last year's earnings.

This business will be primarily composed of the Morningstar Farms brand, which has the highest share and household penetration in the frozen vegetarian/vegan category.
Source: Kellogg Investor Presentation
Even so, the plant-based market is still "emerging" and will need to grow by expanding household penetration and awareness. As such, "Plant Co." will have less flexibility around the dividend as more capital is required to grow the business.

We expect any dividend from "Plant Co." to be minimal and for the company to not be a good fit for most income investors.

Overall, the decision to split up Kellogg's seems more advantageous for the remaining "Global Snacking Co." than it does for the two spinoffs. We like the surviving company's improved growth profile and expect more stock appreciation and dividend growth in the years ahead compared to Kellogg's more recent past.

However, it's hard to get excited about "North America Cereal Co." and "Plant Co." These companies' prospects are less promising, as evidenced by management viewing them as impediments to Kellogg's long-term growth and overall valuation.

If we were Kellogg shareholders, we would consider holding our "Global Snacking Co." shares but would sell "North America Cereal Co." and "Plant Co."

Proceeds could be reinvested into the remaining Kellogg's business or in a similar yielding consumer staples company such as J.M. Smucker, Flowers Foods, or Campbell Soup.

Either way, Kellogg's announced breakup doesn't signal an immediate need to do anything. Investors have time to consider their options, with spinoffs not expected to occur until next year.

We will continue to monitor the situation and provide updates when details about each company's dividend policy emerge.

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