Key Points
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Even with its recent weakness, Mondelez is outpacing its home sector and the broader market.
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The Oreo maker’s dividend yield is more than triple that of the S&P 500.
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That dividend and its growth appear to be safe long-term bets.
- 10 stocks we like better than Mondelez International ›
Corrections, or declines of 10% to 20% from recent highs, are normal and can occur for a variety of reasons. To the latter point, investors considering individual stocks need to assess why a particular name is in the correction “penalty box.”
Inevitably, some corrections signal more bearishness to come, but there are examples of stocks pulling back from their 52-week highs, offering investors potentially compelling opportunities to get involved. Snack giant Mondelez (NASDAQ: MDLZ) is in the latter category.
Shares of the Ritz maker, which yield 3.3%, reside 17.4% below the 52-week high as of Tuesday, July 14. That’s close to a bear market (a decline of 20% or more), but there are reasons to believe this consumer staples stock can get its groove back.
The Fed and a cocoa conundrum
If there’s a bright side to the pullback experienced by Mondelez stock since notching its 52-week high, it’s that the culprits are easy to understand. The big offenders are the Federal Reserve and high cocoa prices. Mondelez isn’t a dedicated chocolate company, but it makes Cadbury chocolate products and Oreos, making it a major cocoa buyer.
Unfortunately, the price of that commodity is soaring, and when that happens, Mondelez passes its higher input costs on to already inflation-wary consumers. Inflation is involved in how the Fed affects high-dividend stocks like Mondelez. Rate hikes are the “blunt instruments” typically deployed by central banks to dampen high consumer and producer prices.
Often, that’s problematic for high-dividend stocks. Higher interest rates usually push Treasury yields higher, prompting many income investors to favor lower-risk U.S. government debt over dividend stocks.
The June reading of the Consumer Price Index (CPI) released Tuesday fell 0.4%, the largest monthly drop since April 2020. There’s still work to be done on the inflation front, but in what could be good news for Mondelez, Fed funds futures show a high probability the central bank will stand pat at its meeting later this month. Standing pat is better than a rate hike.
Here’s something else that shouldn’t be overlooked regarding Mondelez: Although the stock trades well below its 52-week high, it’s up year to date. Actually, it’s outperforming the S&P 500 and the broader consumer staples sector, indicating that even with the cocoa and Fed headwinds, the stock has been surprisingly durable.
A healthy, tasty dividend
Yes, high bond yields can be a drag on select dividend stocks, particularly those from defensive sectors, which Mondelez certainly is. However, there’s something for long-term equity income investors to consider with this stock.
Not only has Mondelez boosted its payout for 14 consecutive years, but some experts see the dividend rising in the high single digits annually through 2035. It’s an attainable target, particularly since the company has no debt coming due for another five years.
For the sake of argument, let’s say “high-single-digit” payout growth equals 7% and core inflation remains stuck at 2.6%, as was the case last month. There are no guarantees that those scenarios will play out in unison, but the point is that Mondelez has the potential to deliver inflation-thumping dividend growth over the long term.
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Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
