I came across an article the other day that promised it had the key to the “best investment ever”.

So, right away, I become uninterested.

That’s click bait, designed simply to generate views (rather than produce meaningful information or an intelligent conversation).

Just for a quick laugh, though, I decided to check it out.

The best investment they came up with?

A career.

The writer stated that you should pick a high-paying career, aim to climb the corporate ladder, and play the game until you’re old so as to increase your earnings potential throughout your life.

Then, I guess, you can retire right around the time your body starts to fail you.

Now, you could argue that either way.

As someone who retired very early in life to chase after dreams that have nothing to do with an office or a cubicle, you can probably surmise what side of the fence I’m on.

The reason I bring this article up is this: the writer stated that a career was the best investment, because stuff like “stocks and bonds” are only good once you’re already rich; there’s no way to make money from those assets unless/until you already have a lot of money.

It’s as if only wealthy people can make money from productive and quality assets. Everyone else has to spend their lives in a career.

Well, I can certainly say that is flat out wrong.

I went from below broke at 27 to financially independent and retired early at 33 – all on a middle-class income.

You can read about that entire journey by checking out my Early Retirement Blueprint.

I didn’t climb the corporate ladder, nor did I have a high-paying career.

But I did live below my means and systematically invest my savings into high-quality dividend growth stocks like those you’ll find on the Dividend Champions, Contenders, and Challengers list.

Jason Fieber's Dividend Growth PortfolioBy being intelligent with life choices, saving, and investing, I was able to build my FIRE Fund – a real-life and real-money dividend growth stock portfolio.

The Fund is the backbone of my financial life.

It generates the five-figure and growing passive dividend income I need to cover my bills and live the early retirement lifestyle.

A critic could point out that it generates that much passive income only because it’s so large.

But that’s ignoring the fact that it got built one day and dollar at a time.

I never invested some huge chunk of money. I saved money from every paycheck, for years of my life, and what you now see is the end result of that discipline and hard work.

Being intelligent about the investing, though, means I’ve always aimed to invest in great businesses that sell products and/or services the world demands, and I always wanted to be partnered up with businesses that reward me with my fair share of the growing profit they’re producing.

That’s why dividend growth investing is such an appealing long-term strategy: you’re sticking to the businesses that are running such profitable enterprises, they gush enough cash to send out growing cash dividend payments to their shareholders. 

A lengthy track record of growing cash dividend payments is the “proof in the profit pudding” – they show you that the company really is growing and making more money.

Furthermore, growing dividend payments are a fantastic source of passive income that you could use to supplant your paycheck (and thus no longer need to climb that corporate ladder).

However, paying any price for any stock isn’t intelligent.

You always want to perform your analysis to make sure you’re investing in a great business.

And you also want to value the stock before you buy it.

Price is what something costs, but value is what something is worth.

Price might be what you pay, but value tells you what you get for your money.

When talking about dividend growth stocks, valuation plays an important part in how that investment performs for you.

Specifically, an intelligent investor should always want to buy a high-quality dividend growth stock when it’s undervalued (i.e., price is well below intrinsic value).

An undervalued dividend growth stock should offer the investor a higher yield, greater long-term total return potential, and less risk. 

That’s all relative to what the same stock might otherwise offer if it were fairly valued or overvalued.

The higher yield plays out due to the fact that price and yield are inversely correlated; all else equal, a lower price will result in a higher yield.

And since total return is comprised of capital gain and investment income, that higher yield positively impacts total return right off the bat.

Meanwhile, capital gain is given a possible boost, too, via the “upside” available between a lower price paid and higher estimated intrinsic value.

If the market more accurately prices that stock in the future, that’s additional capital gain the investor could capture (on top of whatever capital gain would naturally manifest as a company becomes worth more over time).

These dynamics go a long way toward reducing risk.

You introduce a margin of safety when you buy a stock for much less than it’s worth, which protects your downside (the investment ending up worth less than you paid).

Any number of unforeseen events can occur that would reduce the value of a business, so you want to buy a stock for much less than what you think it might be worth.

Undervaluation is obviously favorable to the long-term investor (maximizing upside while minimizing downside).

Fortunately, it’s not terribly difficult to develop a system that can reasonably estimate the fair value of just about any dividend growth stock out there.

Fellow contributor Dave Van Knapp put together one system, that can be used as a template.

You can find that system in Lesson 11: Valuation, which is part of an overarching series of “lessons” on dividend growth investing.

With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…

Mondelez International Inc. (MDLZ)

Mondelez International Inc. (MDLZ) is a global confectionery, snack food, and beverage company that operates in approximately 160 countries.

With brands like Oreo, Ritz, Nabisco, Triscuit, and Cadbury, Mondelez is one of the premier companies in the snack food space.

We’re essentially talking cookies, crackers, and candy here. The triple-C. The trifecta.

It’s a simple business model predicated on a very basic idea: people enjoy snack foods, and they tend to enjoy the premium, branded snack foods that deliver a high-quality, consistent experience.

Breaking sales down by region, Mondelez saw its FY 2017 revenue derived as following: Europe, 28%; North America, 26%; Asia, Middle East & Africa, 22%; and Latin America, 14%.

So you’re looking at a company that is getting just a bit over 25% of its sales from the mature NA market, while it’s heavily exposed (almost 40% of sales) to faster-growing emerging markets that will likely fuel much of the growth looking out over the next decade or two.

Great businesses that are easy to understand are my bread and butter. In this case, it’s my crackers and cheese.

That’s because it sets you up for a rich environment for building wealth and passive dividend income.

In this case, Mondelez has paid an increasing dividend for seven consecutive years.

Not a very long time, but the short track record is due purely to the fact that this company was spun off from Kraft Foods Inc. (now Kraft Heinz Co. (KHC)) in 2012.

Starting from a payout ratio of essentially 0%, the company has been aggressively increasing its dividend since initiating it: the five-year dividend growth rate is 44.5%.

There’s been some leveling out, as should be expected, but even the most recent dividend increase was a very impressive 18.2%.

And with a 51.5% payout ratio, the dividend appears to be healthy and sustainable, although that massive dividend growth of late will almost surely moderate into a more reasonable range that more closely correlates with EPS growth moving forward.

But I still think investors can expect very strong dividend growth for the next few years (perhaps even in the low double digits), and that’s coming on top of a fairly appealing yield of 2.42%.

That yield, by the way, is more than 80 basis points higher than the stock’s own five-year average.

It’s also well above the broader market’s yield, and it’s higher than the industry average.

So it’s not a yield that’s going to knock your socks off at first glance, but it is pretty attractive when you start lining it up in relative terms. And the numbers start to look great when you factor in that dividend growth.

But in order to get an idea of what kind of dividend growth we can expect when looking out into the future, we’ll have to first gauge an expectation for earnings per share growth.

With the payout ratio being where it is, the two will likely mirror each other over the long run.

And building that expectation relies both on looking at what a company has already done, as well as what it might do going forward.

So we’ll first look at top-line and bottom-line growth for Mondelez since it was spun off, and then we’ll compare that to a near-term professional forecast for profit growth.

Extrapolating out the known past with an informed estimate of the future should tell us a lot about where this company might be going, which will later help us value the stock.

I’d usually use the last decade as a proxy for the long haul, but Mondelez hasn’t been an independent company for that long, so we’ll instead look at what’s happened since 2013. This is, admittedly, not a lot to go on, but that’s why we’re also going to compare that to the forecast.

The company’s revenue decreased from $35.299 billion in FY 2013 to $25.896 billion in FY 2017.

So that’s definitely not what we want to see; however, this appears to be due to miscellaneous divestitures, unfavorable currency impacts (Mondelez is mostly an international business), and the deconsolidation of its Venezuelan operations, rather than a problem with the core business or its products.

Earnings per share basically moved sideways over this same period, slightly decreasing from $2.19 to $1.91.

EPS was buoyed by share repurchases and a slight margin expansion; the outstanding share count dropped by over 14% over this rather short period of time, which is pretty impressive. And since the stock didn’t appear to be outrageously valued over that stretch, it seems like a prudent use of capital.

It’s unfortunately a muddy picture here because of the short independent history and numerous impacts, which is why I’ll be relying a bit more on the forward-looking forecast than usual.

There’s nothing I can see that would indicate this is anything but a company with great brands trying to find its legs. Said another way, I think the future looks brighter than the near-term past.

For perspective on that, CFRA is calling for Mondelez to compound its EPS at an annual rate of 10% over the next three years, which would clearly be more in line with what we’d like to see from this business.

Strengthening market demand for products, recent price increases, and improved productivity are all cited as reasons for continued margin expansion and a greater growth trajectory looking out over the next few years.

Moving over to the balance sheet, the long-term debt/equity ratio is 0.50, while the interest coverage ratio is just over 9.

These are good numbers. I wouldn’t say they’re excellent, but it’s a solid balance sheet.

The only concern I might have with the balance sheet is that there isn’t a lot of cash there, but it’s not like this company should have any issues with accessing cash.

Profitability looks strong, although the GAAP numbers have been volatile over the last few years. But when the numbers appear to be fairly “clean”, profitability is stout.

Over the last five years, the company has averaged annual net margin of 11.92% and average return on equity of 12.62%.

These averages are a pretty fair representation of profitability, in my view.

Overall, this is a low-risk business that’s extremely easy to understand. If you want to be in the snack food space, few companies give you better or more direct exposure to that.

And the stock has mostly gone nowhere over the last few years, which is deserved. The company hasn’t found its footing. And competition in this space remains intense.

However, the dynamics appear to be improving. Recent quarters have looked good. And the forecast for future growth is very attractive.

Yet the valuation doesn’t seem to be accounting for this company’s future potential…

The P/E ratio is coming in at 21.20 right now, which is quite a nice discount to the broader market. It’s also way below the stock’s own five-year average P/E ratio, although that average is being skewed by abnormalities in GAAP EPS.

However, even the P/CF ratio (which cuts right to the heart of the matter), at 18.4, is discounted nicely when compared to this stock’s three-year average P/CF ratio of 20.3.

And the yield, as noted earlier, is significantly higher than its own recent historical average.

So the stock does look cheap, but how cheap might it be? What would a rational look at intrinsic value look like? 

I valued shares using a dividend discount model analysis.

I factored in a 10% discount rate and a long-term dividend growth rate of 7.5%.

That growth rate is on the upper end of what I normally allow for, but I think the business model could sustain that for the long term when looking at where the payout ratio, growth profile, and historical dividend growth rate are all at.

There’s quite clearly a commitment to the dividend and the growth of it.

Near-term dividend growth may actually exceed 7.5%, but I think the long-term numbers will average out (factoring in a later slowdown).

The DDM analysis gives me a fair value of $44.72.

The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.

The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.

It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.

I find it to be a fairly accurate way to value dividend growth stocks.

My analysis concludes the stock is at least moderately undervalued.

But we’ll now compare that valuation with where two professional stock analysis firms have come out at, which adds balance, depth, and perspective to our conclusion and final valuation.

Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.

1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.

Morningstar rates MDLZ as a 4-star stock, with a fair value estimate of $52.00.

CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.

They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.

CFRA rates MDLZ as a 4-star “BUY”, with a 12-month target price of $48.00.

I was the most conservative here, but averaging the three numbers out gives us a final valuation of $48.24. That would indicate the stock is potentially 13% undervalued right now.

Bottom line: Mondelez International Inc. (MDLZ) is a premier company in the global snack food space. It operates a very simple business model that should continue to do well for many years to come. With accelerating EPS growth, robust profitability, a clear commitment to dividend growth (including a recent 18%+ dividend increase), and the possibility that shares are 13% undervalued, this is a stock that dividend growth investors should consider snacking on.

-Jason Fieber

Note from DTA: How safe is MDLZ’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 65. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, MDLZ’s dividend appears safe with a very unlikely risk of being cut. Learn more about Dividend Safety Scores here.

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