The rise of AI is starting to introduce fears over mass job loss.
If AI which is smarter than any person can be installed into functional robots, humans start to look pretty obsolete.
That’s a very different type of world than the one we’re used to.
And if human workers are no longer needed (because they’re being replaced by robot workers), what does that mean for work, purpose, and income for the masses?
While addressing purpose is a very complex topic going well beyond the limits of today’s article, there’s good news on the income front.
We can all start to build totally passive income that is separate from and insulated against jobs.
Reducing job dependency should be everyone’s goal right now.
And reducing dependence automatically means increasing independence – that’s financial independence.
In my view, the best way to achieve financial independence is via dividend growth investing.
This long-term investment strategy encourages buying and holding shares in world-class businesses paying out consistent, growing dividends to shareholders.
You can find hundreds of examples by perusing the Dividend Champions, Contenders, and Challengers list – a fantastic compilation of US-listed stocks (along with data on each) which have raised dividends each year for at least the last five consecutive years.
If you can build a portfolio chock-full of high-quality businesses paying you enough growing dividend income to live off of – income which is totally passive and separate from your day job – you’re financially independent.
Being no longer dependent on a job positions you very well for “whatever may be” as it pertains to AI and robotics.
I’ve set myself up in this very manner, spending the last 15 years of my life building the FIRE Fund.
That’s my real-money portfolio, and it generates enough five-figure passive dividend income for me to live off of.
I’ve actually been in this blessed spot since I quit my job and retired in my early 30s.
If you’re curious about how I did it, be sure to give my Early Retirement Blueprint a read.
Now, one aspect of dividend growth investing that’s central to one’s success is valuation.
See, price is only what you pay, but it’s value that you ultimately 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.
Utilizing dividend growth investing by steadily accumulating undervalued high-quality dividend growth stocks to build enough passive dividend income to live off is a great way to prepare for what’s coming.
Of course, pouncing on undervaluation first requires one to know what to look for.
That’s why Lesson 11: Valuation is so useful.
Written by fellow contributor Dave Van Knapp, it explains what valuation is (using simple terminology) and provides a template for you to use.
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 a $75 billion (by market cap) confectionary and snack monster that employs approximately 90,000 people.
The company reports results across four geographic segments: Europe, 39% of FY 2025 revenue; North America, 28%; Asia, Middle East & Africa, 21%; and Latin America, 12%.
Developed markets account for roughly 61% of sales, while the remainder comes from developing markets.
The Biscuits and Baked Snacks category accounts for roughly half of revenue, while the Chocolate category accounts for roughly one-third of revenue.
Mondelez employs a simple but highly effective business model by selling branded confectioneries and snacks to billions of people all over the world.
These products have four powerful characteristics.
First, they’re enjoyable.
Sweet/salty snacks 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.
These products 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 repeatable purchases easy choices.
Fourth, they’re branded.
Recognizable brands (such as billion-dollar brands Cadbury, Oreo, and Ritz) 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.
Putting all of this together helps to explain how Mondelez has built a global empire, steadily growing its revenue, profit, and dividend along the way.
Dividend Growth, Growth Rate, Payout Ratio and Yield
Yes, Mondelez has increased its dividend for 14 consecutive years.
Notably, this track record for dividend growth 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.
This means Mondelez has been a dividend payer and grower since the start.
Its 10-year dividend growth rate of 11.6% is strong and really stands out in a weak industry, although a lot of this was fueled by expanding what was a very low payout ratio after Mondelez became independent and started growing the dividend faster than the underlying business.
Still, even the most recent dividend increase of 6.4% is quite respectable, especially considering the challenging environment for Big Food (which I’ll touch on soon).
The payout ratio, after rapid expansion, is now at 74.9% – somewhat high, but not indicating any kind of immediate danger to the dividend.
The good news?
The stock yields 3.4%.
All of that dividend growth has added up, aided by a weak stock.
Combining the two has resulted in a very nice yield for those getting in today, as this market-beating yield is 110 basis points higher than its own five-year average.
That’s a huge spread, meaning the compensation for, perhaps, slower dividend growth on a go-forward basis is that much higher starting yield.
Certainly a more favorable setup for those preferring their income now.
Revenue and Earnings Growth
As favorable as it may be, though, much of this is formulated using past information.
However, investors must always have the future in mind, as today’s capital gets put on the line and risked for tomorrow’s rewards.
As such, I’ll now build out a forward-looking growth trajectory for the business, which will come in handy when later estimating fair 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.
I’ll then reveal a professional prognostication for near-term profit growth.
Amalgamating the proven past with a future forecast in this way should allow us to put together a good idea of where the business could be going from here.
Mondelez advanced its revenue from $25.9 billion in FY 2016 to $38.5 billion in FY 2025.
That’s a compound annual growth rate of 4.5%.
As mature business in this space go, that’s actually quite respectable.
We have to keep in mind this is a defensive, stable investment, not some speculative, high-growth bet.
I typically look for a mid-single-digit (or better) top-line growth rate from a large company, and Mondelez is hanging in there.
Meanwhile, earnings per share grew from $1.04 to $2.92 (adjusted) over this period, which is a CAGR of 12.2%.
While this is an impressive rate of bottom-line growth for this type of business, it’s not totally accurate.
I did use adjusted EPS for FY 2025, and that’s only because recent results have been impacted by unprecedented cocoa cost headwinds.
A historic spike in cocoa has had ripple effects across the entire industry, particularly impacting those companies with a lot of confectionary exposure (such as Mondelez).
Looking forward, CFRA believes that Mondelez will compound its EPS at an annual rate of 1% over the next three years.
Notably, CFRA cut this number (along with its 12-month target price) fairly meaningfully after Mondelez released its Q4 FY 2025 earnings report on February 3.
I think it’s fair to be less than enthusiastic about Mondelez over the very near term, as the company faces numerous challenges in its space.
First, there’s the general malaise across mature food companies as consumers’ eating and spending habits evolve.
Second, the rise of GLP-1s may very well permanently reduce demand for the products that Mondelez brings to the marketplace.
Third, and more specifically to Mondelez, the spike in cocoa prices will weigh on this year’s results, especially since Mondelez hedged the majority of its its near-term cocoa needs at prices above current spot levels.
That last mark is a short-term issue which will roll off, but the other two problems are more structural in nature.
However, on the flip side, Mondelez has been navigating changing habits for its entire existence, and I don’t see why the ability to adapt is suddenly gone.
And GLP-1s are still new, making it impossible to quantify the influence of this new class of drugs.
But the market has a habit of acting first and asking questions later, and a lot of trouble has already been pushed into the stock and its valuation.
In the interim, patient investors getting in today are able to lock in a yield that’s way above average and get paid to wait.
Financial Position
Moving over to the balance sheet, Mondelez has a good financial position.
The long-term debt/equity ratio is 0.7, while the interest coverage ratio is approximately 13.
The company carries investment-grade credit ratings: BBB, S&P; BBB, Fitch.
While this isn’t the best balance sheet out there, the total long-term debt load of just over $17 billion is not egregious relative to the market cap.
Profitability is adequate.
Return on equity has averaged 13.6% over the last five years, while net margin has averaged 11.3%.
Both metrics have been tarnished by cocoa pricing headwinds.
In better times, Mondelez generates high returns on capital and fat margins.
Overall, while it doesn’t look quite as good as it did a few years ago, Mondelez is still a global powerhouse.
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.
While regulation and litigation are not onerous for Mondelez, its space is notoriously competitive.
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 long-term threat to demand for snack foods, but Mondelez does focus on timeless products attached to beloved brands.
This business’s profile does not strike me as all that risky, but the stock’s 15% slide over the last six months has baked in a lot of risk…
Valuation
The stock is trading hands for a P/E ratio of 20.3, based on adjusted EPS.
For a global powerhouse in a stable industry, that’s not demanding at all.
For context, this is below its own five-year average of 22.6.
The sales multiple of 2 is also well under its own five-year average of 2.7.
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%.
This growth rate looks downright conservative relative to what Mondelez has done over the last decade in terms of both dividend and EPS growth, but it’s close to where the most recent dividend raise came in at.
I think that last dividend raise, which already incorporates those near-term issues I touched on, is a good baseline upon which to build expectations on a go-forward basis.
Although I don’t think Mondelez will continue its double-digit dividend growth of the past, I don’t see anything to indicate that this global powerhouse can’t do high-single-digit dividend growth over time.
The next year or two may be slow as Mondelez works off hedges, but dividend growth should pick up thereafter.
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.
A lot of damage has been done to the stock over the last six months, which I think has created an attractive valuation.
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 5-star stock, with a fair value estimate of $73.00.
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 3-star “HOLD”, with a 12-month target price of $62.00.
I came out very close to where Morningstar is at. Averaging the three numbers out gives us a final valuation of $68.78, which would indicate the stock is possibly 14% undervalued.
Bottom line: Mondelez International Inc. (MDLZ) is a global powerhouse in snacking, controlling multiple billion-dollar beloved brands. These branded snacks are enjoyable, affordable, and consumable, leading to sales visibility and recurring revenue. With a market-beating yield, double-digit dividend growth, a maintainable payout ratio, nearly 15 consecutive years of dividend increases, and the potential that shares are 14% undervalued, long-term dividend growth investors looking for value, income, and stability in this market have a great candidate here.
-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 MDLZ.
