Mondelez International

Chocolate during Lent?

Carnival is over and we're currently in the 40 days of Lent (at least for Christians). One person gives up alcohol during this time, another quits smoking, and someone else maybe skips the sweet temptation of chocolate. Even without the "religious obligation," I think fasting every now and then isn't a bad idea at all. You could, for example, take a social media break, or go without the internet entirely for a while. This year I want to take a vacation trip with my friends without smartphones. I think it'll definitely be a very special experience, and I'm already looking forward to it. By the way, that also means I'll probably take a 2-week break from articles this year.

As investors, on the other hand, we definitely don't have to fast or go without right now. On the contrary: right now, during the corona correction (currently only a correction - it's only a crisis at more than -20%), wonderful buying opportunities may come up. That's why today I'm introducing you to the chocolate empire of Mondelēz International.

The history and business model of Mondelēz International Inc.

Mondelēz International emerged from the split of the food company Kraft Foods in 2012. The publicly traded Kraft Foods Group Inc. later merged with the H. J. Heinz Company. Together they now form The Kraft Heinz Company. By the way, investing legend Warren Buffett was heavily involved in this merger. I'll cover the full history of The Kraft Heinz Company, in which the tobacco company Altria also played a key role, in a separate article. So here I'd like to break down the origins of two of the most relevant brands of today's Mondelēz International.

The history of Milka chocolate begins in 1797, when Philippe Suchard was born in Boudry (Switzerland). At age 12, he was sent to buy chocolate at a pharmacy for his sick mother. Chocolate, known as an exotic tonic, was still very expensive back then. Suchard quickly became certain that he had to find a way to produce this cocoa mass cheaply and in good quality. At 17, he began an apprenticeship as a confectioner in his brother Frédéric's confectionery shop. It would take another 11 years before he went into business for himself and began making his own chocolate. A year later, in 1826, he moved into an empty mill in the neighboring village of Serrierès. To perfect his chocolate, he developed the mélangeur on his own - a machine for mixing sugar and cocoa powder. It was this machine that gave his chocolate its delicately melting character. Little by little, his product became better known and more popular. With clever marketing and constant new creations, today's Milka (Milch and Kakao, German for milk and cocoa) is one of the best-selling chocolates in the world.

As luck would have it, exactly two days ago today was "National Oreo Cookie Day" in its home country, America. On March 6, 1912, the first tin full of delicious Oreos went over the counter for just 25 cents a pound. The cookie was developed by the National Biscuit Company. Nabisco, as it was abbreviated, was founded in the 1890s when a total of 114 local bakeries joined forces. Together they developed various types of cookies, candy, and other snacks. Business was great and the company kept growing. For example, it took over the Shredded Wheat Company in 1928. In 1985, however, it was itself bought by the tobacco company Reynolds American Inc.. 15 years later it changed hands again and moved into the portfolio of Philip Morris Companies Inc.. From 2007 on, it belonged to the then-subsidiary Kraft Foods, which, as described above, split up in 2012. Since then, the international business has been run under Mondelēz International. Besides Milka and Oreo, many other well-known brands belong to the company portfolio. Among them are several power brands (brands with at least $1 billion in annual revenue): Cadbury chocolate, LU cookies, Tang drinks, Philadelphia cream cheese, and of course Milka and Oreo. In general, the company is active in the following five business areas: chocolate, cookies, beverages, food, and gum & candy. That makes Mondelēz International pretty broadly diversified.

How will Mondelēz International develop in the future?

In fact, Mondelēz International's business has developed significantly better than that of The Kraft Heinz Company. It really seems like it was the right decision to spin off the confectionery company and let it run free. Mondelēz is constantly trying to broaden its base, both internally and externally. Internally, it does this through new creations and clever combinations of different brands from its portfolio. So there are now delicious new creations such as Milka & Oreo, Milka & Lu cookies, Milka & TUC crackers, or Milka & Daim. This smart marketing trick is nothing other than cross-promotion: Milka fans might try one of the other brands for the first time, and vice versa.

Externally, Mondelēz of course grows through suitable acquisitions. Most recently, it secured a majority stake in Toronto-based Give & Go Prepared Food Corp. for a hefty $1.2 billion. With the owner of the "two bite" brownies, it wants to push further into the bakery business. The deal is expected to close in Q2 2020.

One topic that will surely occupy Mondelēz International's executives too is cocoa possibly getting more expensive. The world's two largest exporters of cocoa beans, Ghana and the Ivory Coast, have joined forces in a cocoa cartel. Modeled on the oil cartel OPEC, the two countries named their initiative Copec. With it, they want to push through a 30 percent price increase that is meant to benefit local farmers. In my opinion, this shouldn't be a problem. I'm happy to pay more for chocolate if everyone in the value chain earns more from it accordingly.

Another topic that's surely being discussed a lot on the board is marketing to millennials. The days when well-known brands were bought without a second thought are long gone. I think this is one of the reasons why companies like Kraft Heinz have a much harder time today. Small start-ups regularly enter the market, perhaps offering more sustainable or more interesting products. With sophisticated marketing strategies, they lure away otherwise loyal brand customers. But I don't think this trend is bad at all. Competition is good for business, and only those who can convince in the long run will survive ...

Finally, I'd like to bring up a current topic: corona. And I can understand that many of you probably can't stand hearing about it anymore - corona here, corona there, corona EVERYWHERE! So I'll keep it short. In the corona epidemic there will be companies that come out as clear corona losers and others that might even benefit from corona. Airlines and tour operators will certainly suffer massive drops in revenue. But when I look at the hysteria that has broken out in many supermarkets, I see clear corona winners here. Demand has skyrocketed, especially for hygiene products - Reckitt Benckiser, Procter & Gamble, or Ecolab will be pleased. Demand for over-the-counter medications has also risen (Johnson & Johnson). And of course the food industry also benefits from panic buying: Unilever, Nestlé, or indeed Mondelēz should therefore come out of a crisis like this stronger. But you shouldn't blindly buy all these companies now. It's quite possible that markets will head down quite a bit more.

And how's the dividend doing?

According to various sources, Mondelēz International shareholders have received a payout since 2001. Some of you may now be wondering how that's possible when the company has only existed since 2012. Well, it was spun off from Kraft Foods - if you were already invested there as a shareholder, you've been getting a dividend since 2001. Since 2012, the dividend has been raised annually - the average over the last 5 years is 13.63%. The current dividend yield is 2%, and at 42% the payout ratio is still in the green zone too.

Conclusion:
Mondelēz International is a broadly positioned confectionery company that tempts with many a delicious treat. The separation from its former parent company has done the company a lot of good, and it has developed very well since then. I also see Mondelēz's future positively - we don't want to and simply can't do without treats like these. Pure dividend investors will find more attractive candidates. But anyone who wants to add a great company to their portfolio can buy here without hesitation.