by Jeff Reeves | December 28, 2012 6:08 am
Junk food is a great place to invest. It’s recession-proof — and in fact, in hard times the simple pleasures of snacks can see people through. It’s also a big growth industry as Western brands seek out emerging market opportunities thanks to an affluent and growing middle class in regions like Latin America and Asia.
It’s also worth noting that while consumer staples (yes, junk food is considered a staple) are commonly held as crash-proof investments, they are also impressive profit producers, too. Consider that Coca-Cola (NYSE:KO) has a total return of about 120% over the past decade when you bake in dividends! Roughly 12% annually is hardly a sleepy investment.
If you want to fill up your cupboard with a junk food brand, Mondelez International (NASDAQ:MDLZ) is worth a look. The company was recently separated from parent Kraft (NASDAQ:KRFT) so Mondelez and its leadership can focus on the very different nature of global snack brands like Oreo instead of grocery store favorites like mac & cheese.
Richard Band, editor of Profitable Investing, is currently recommending Mondelez stock. Here’s why he likes it:
Mondelez (pronounced Mon-dah-LEEZ) makes food, one of the necessities of life — and one of the safest investment categories there is. Created in October when Kraft Foods spun out its North American grocery operations, MDLZ retains Kraft’s international brands (the faster-growing part of the business). Cadbury and Toblerone chocolates are a staple of the company’s lineup, along with Oreo and Ritz baked goods, as well as Trident and Dentyne chewing gum. All told, MDLZ boasts 11 brands with over $500 million of annual sales.
At 16X estimated 2013 earnings, MDLZ doesn’t appear, at first blush, to be steal-me cheap. What intrigues me, though, is the company’s long-term growth potential. Already, MDLZ derives 44% of its sales from emerging markets, a proportion similar to Coca-Cola and higher than Nestle (PINK:NSRGY).
Mondelez is also paying out a fairly small 33% of projected 2013 profits as dividends. That means the company has leeway to raise its dividend sharply—a boon in the coming era of higher taxes. Current yield: 2%.
Since Oct. 1, the stock is off more than 10%. But if the emerging market investment thesis holds up in the long term, Mondelez could throw off much bigger dividends and see shares move higher. Though as Richard points out, the high P/E is certainly a concern — so tread carefully.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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