Is the future predetermined, or is there no fate but what you make?
Nobody knows for certain.
But what I do know is, we appear to have some control over out futures and outcomes.
Bad choices tend to result in bad outcomes, and vice versa.
And it’s because I badly desire great outcomes in my life, I’ve decided to live below my means and consistency invest my excess capital.
This puts the “future me” in a great position to thrive – no matter what the universe throws at me.
Regarding how I invest, I’ve chosen dividend growth investing.
This is a long-term investing strategy that advocates buying and holding shares in world-class businesses rewarding shareholders with safe, growing cash dividend payments.
These growing cash dividends are funded by growing profits, and growing profits require a business to do a lot of things right.
This circular feedback loop makes this strategy highly effective, and those growing dividend payments can be the bedrock of financial independence (where one can cover their bills with totally passive income).
You can find hundreds of stocks that qualify for the strategy over on the Dividend Champions, Contenders, and Challengers list – a compilation of US-listed stocks that have raised dividends each year for at least the last five consecutive years.
Many of the companies on this list have been (and continue to be) some of the best long-term investments in the world, providing shareholders with lucrative, rising dividends all while revenue, profits, and share prices grow and compound over time.
I’d know, as I’ve seen all of this firsthand.
Consistently accumulating high-quality dividend growth stocks over the past 15 years has allowed me to build the FIRE Fund.
That’s my real-money portfolio, and it generates enough five-figure passive dividend income for me to live off of.
This passive income has actually been enough for me to live off of since I quit my job and retired in my early 30s.
By the way, my Early Retirement Blueprint explains how I was able to retire at such a young age.
The dividend growth investing strategy can be highly effective for many reasons (some of which I just went over), and one of those reasons is how it attunes investors to valuation whenever they allocate capital.
That’s because price only represents what you pay, but value represents what you get.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
Prospective investment income is boosted by the higher yield.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
These dynamics should reduce risk.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
We appear to have control over our futures, and living below our means and investing our savings into undervalued high-quality dividend growth stocks is a fantastic way to put our “future selves” in positions to thrive and even become financially independent.
Of course, the preceding passage does make a lot more sense when one already understands the ins and outs of valuation.
If you need a bit of help on that, make sure to read Lesson 11: Valuation.
Written by fellow contributor Dave Van Knapp, it describes what valuation is, why it’s important, and how to use simple tools to estimate fair values.
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 an American multinational confectionery, snack food, and beverage company.
Founded in 2012, but with certain corporate roots dating back to 1923, Mondelez is now an $82 billion (by market cap) confectionary and snack giant that employs approximately 90,000 people.
The company reports results across four geographic segments: Europe, 36% of FY 2024 revenue; North America, 30%; Asia, Middle East & Africa, 20%; and Latin America, 14%.
Developed markets account for roughly 61% of sales, while the remainder comes from developing markets.
FY 2024 revenue can also be broken down by product category: Biscuits and Baked Snacks, 49%; Chocolate, 31%; Gum and Candy, 11%; Cheese and Grocery, 6%; and Beverages, 3%.
We have a simple but effective and beautiful business model here: Mondelez produces and sells snacks to billions of people around the world.
These snacks have four powerful characteristics – characteristics carefully crafted and curated – working in Mondelez’s favor.
First, they’re enjoyable.
Sweet/salty snacks which are enjoyable invoke a pleasurable, dopamine-driven response when consumed.
Second, they’re consumable.
Once consumed, these snacks must be repurchased, creating a source of recurring revenue for Mondelez.
Third, they’re affordable.
Mondelez sells a range of products which tend to feature low nominal price points, usually ranging around a few dollars per package (with individual servings usually costing well under one dollar), making purchases an easy decision.
Fourth, they’re branded.
Recognizable brands (such as Cadbury, Oreo, and Ritz – three brands doing more than $1 billion in sales per year) create a sense of consistency, quality, and trust for the consumer, and Mondelez has built market-leading positions (such as the #1 global position in biscuit, as well as the #2 global position in chocolate) with these brands.
Put simply, people love to consume and repeatedly purchase enjoyable, affordable, branded snacks.
Per the 2024 State of Snacking report, 91% of consumers snack daily, and 85% report longtime loyalty to specific brands – both up from the 2023 report.
Mondelez takes the innate desire for consumable products and reinforces that desire with recognizable brands, creating a combination that is nearly unbeatable.
And that’s why the company continues to ring up revenue, profit, and dividend growth.
Dividend Growth, Growth Rate, Payout Ratio and Yield
Indeed, Mondelez has increased its dividend for 14 consecutive years.
This track record is as long as it possibly could be, dating back to the 2012 spin-off of Mondelez from its former parent company Kraft Foods Inc.
Its 10-year dividend growth rate is 11.6%, which is strong, and Mondelez has been pretty consistent when it comes to handing out 10%+ dividend raises (although its most recent dividend raise of 6.4% reflects some industry challenges).
But it should be noted that much of that dividend growth was fueled by Mondelez becoming an independent company and working with a very low payout ratio out of the gate.
As such, future dividend growth may slow.
Still, even a permanent slowdown into a high-single-digit dividend growth rate would be acceptable, considering the stock’s starting yield of 3.2%.
That market-beating yield, by the way, is 70 basis points higher than its own five-year average.
Over much of its history, this stock has yielded somewhere around 2%, so seeing a 3%+ yield is unusual.
I think the market has revalued the stock and adjusted the yield higher in order to compensate for some slowing of growth in the face of industry dynamics (which I’ll touch on later).
For those who prefer a bird in the hand today over more possible birds in the bush at some point in the future, getting that higher yield today may actually be a positive development.
One concerning point regarding the dividend, which should be monitored, is the payout ratio, which has risen to 73.3%.
Recent profit results have been somewhat weak and volatile, driven by factors such as unprecedented cocoa cost inflation, but a normalization in cocoa costs will likely strengthen EPS and alleviate some pressure on the payout ratio.
What we have here is a 3%+ yield growing at a HSD+ rate, and it’s coming out of one of the world’s most prestigious snack food companies.
I think that’s a very nice setup, particularly for those who have a predilection for yield/income.
Revenue and Earnings Growth
As nice as it may be, though, this setup is largely based on past dividend metrics.
However, investors must always have their minds trained on the future, as the capital of today ultimately gets risked for the rewards of tomorrow.
Thus, I’ll now build out a forward-looking growth trajectory for the business, which will come in handy when it comes time to estimate intrinsic value.
I’ll first show you what the business has done over the last decade in terms of its top-line and bottom-line growth.
And I’ll then reveal a professional prognostication for near-term profit growth.
Lining up the proven past with a future forecast in this manner should give us the information necessary to confidently build an opinion on where the business may be going from here.
Mondelez moved its revenue from $29.6 billion in FY 2015 to $36.4 billion in FY 2024.
That’s a compound annual growth rate of 2.3%.
Not exactly inspiring top-line growth, but there’s some important context behind this.
The company has made great strides in shifting and optimizing its product portfolio over the last several years, concentrating the lineup on faster-growing, more profitable snack foods.
This strategy included divestitures, such as the sale of its developed market gum business to Perfetti Van Melle Group for $1.4 billion.
Simultaneously, Mondelez completed acquisitions, including the purchase of Clif Bar & Company in 2022 for approximately $2.9 billion.
Revenue has been uneven as a result, making it challenging to get an accurate read on the sales growth profile.
Revenue dropped materially after FY 2014, and then stayed fairly flat for a few years, but it has since increased by more than 40% since FY 2019.
Meanwhile, adjusted earnings per share increased from $1.75 to $3.36 over this period, which is a CAGR of 7.5%.
I think that gives us a better idea of Mondelez’s growth trajectory.
Inclusive of some accretion from portfolio churn, as well as serious buybacks (the outstanding share count has been reduced by nearly 20% over the prior decade), Mondelez has been good for high-single-digit bottom-line growth.
However, the dividend growth exceeding this mark is what’s led to the payout ratio now being elevated (which is why near-term dividend growth will likely be below trend).
Looking forward, CFRA sees Mondelez compounding its EPS at an annual rate of 5% over the next three years.
The fly in the ointment right now is cocoa costs, which have been unprecedented.
In the face of this, Mondelez has been taking price, but this has led to a sacrifice on volumes.
This short-term gain for long-term pain is, in my view, unwise, but I believe the harm done is at the margins (due to the strength of the company’s brands).
CFRA notes: “Growth will stem from pricing, as [Mondelez] implements multiple price increases in chocolate categories to offset unprecedented cocoa inflation (chocolate represents 30% of total sales and over 50% of Europe sales). Within non-chocolate sales (70% of the business), we expect growth in categories like biscuits and gum/candy.”
CFRA then adds: “2025 is challenging given significant cocoa inflation, but cocoa futures have declined since late January 2025. Investor focus shifts to 2026 normalization as profits/ margins recover from pricing and cost reductions.”
I think that latter passage is the crux of the matter: Mondelez appears to be coming out of the other side of this rare cocoa price shock, and pricing/volumes will normalize.
It’s been a bumpy ride over the last few years, but Mondelez is built to last.
I don’t have a problem with CFRA’s near-term growth forecast, but I’d also say that Mondelez should be fully capable of getting back to a high-single-digit to low-double-digit type of EPS/dividend growth rate once it’s fully moved past all of this turbulence.
To this point, CFRA states its near-term forecast is weighed down by a brutal 2025, but it expects a rebound shortly thereafter: “We forecast EPS to be down 5% to $3.19 in 2025 due to cocoa inflation, but 12% growth to $3.56 in 2026, returning to long-term algorithm.”
To me, that sounds like shareholders should anticipate a tough 12-24 months, but the long-term picture still looks very bright.
Plus, you get compensated with a 3%+ yield for the near-term turbulence while awaiting that return to former glory.
Financial Position
Moving over to the balance sheet, Mondelez has a solid financial position.
The long-term debt/equity ratio is 0.6, while the interest coverage ratio is over 13.
A total long-term debt load of barely over $15 billion is somewhat immaterial when lined up against the company’s market cap.
Relative to quite a few competitors in the packaged food space, Mondelez has long carried a stronger balance sheet, which I applaud.
Profitability is very respectable.
Return on equity has averaged 14.6% over the last five years, while net margin has averaged 12.7%.
You’ll sometimes see competitors with higher returns on capital, but ROE is often juiced by more leveraged balance sheets.
Overall, Mondelez remains a snacking giant that commands some of the best fundamentals, market positioning, and brands in the world.
And with economies of scale, a global distribution network, brand recognition, and pricing power, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Regulation, litigation, and competition are omnipresent risks in every industry.
Competition, in particular, is fierce in this space.
Input costs, such as raw materials (including, most notably, cocoa), are volatile and have recently faced a lot of inflation.
Being a global enterprise, Mondelez has exposure to geopolitics and currency exchange rates.
Snacks are a discretionary purchase, so any major economic weakness could cause a pullback in snacking.
The rise of GLP-1 drugs are a new risk and pose a threat to demand for snack foods.
Overall, I don’t see this business model as especially risky.
Yet, with the stock down nearly 20% from recent highs, the valuation seems to be pricing in a lot more risk than what appears to be present…
Valuation
The stock is trading hands for a P/E ratio of 22.5.
While that might not seem all that low, this is based on GAAP EPS which has been impacted by temporary issues (such as cocoa costs).
Yet, this is still below its own five-year average of 22.9, despite being an unfair comparison.
A better comparison might be the sales multiple – at 2.2, it’s far lower than its own five-year average of 2.9.
And the yield, as noted earlier, is significantly higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of 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%.
Seeing as how Mondelez was able to compound its EPS at a 7%+ annual rate over the last decade, which fueled low-double-digit dividend growth (boosted by an expansion of the payout ratio), I don’t see my expectation as being overly difficult for the company to meet.
All signs point to a slower-than-usual 2025 (and, perhaps, 2026), but Mondelez should then be able to get back to its usual LSD-HSD type of EPS/dividend growth profile thereafter.
With the business being as good as it is, and with deft navigation throughout unprecedented cocoa cost inflation (albeit with a self-inflected wound of sacrifice on volumes in the name of protecting margins), I don’t see why Mondelez can’t do 7%+ over the long haul.
The DDM analysis gives me a fair value of $71.33.
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 view is that there’s some material undervaluation present here.
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
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 $75.00.
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 $79.00.
Surprisingly, I come out looking conservative. Averaging the three numbers out gives us a final valuation of $75.11, which would indicate the stock is possibly 18% undervalued.
Bottom line: Mondelez International Inc. (MDLZ) is a high-quality company commanding numerous beloved brands across snacking, an area of food consumption which benefits from enjoyability, affordability, repeatability, and loyalty. With a market-beating yield, double-digit dividend growth, a sustainable payout ratio, more than 10 consecutive years of dividend increases, and the potential that shares are 18% undervalued, long-term dividend growth investors should consider snacking on this deal while it’s still around.
-Jason Fieber
Note from D&I: 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 66. 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 an unlikely risk of being cut. Learn more about Dividend Safety Scores here.
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Disclosure: I’m long GIS.
