With sector rotation upon us, it is time for investors to take a more significant bite out of safe-haven names like Mondelez (NASDAQ: MDLZ). The rotation is due to the recent inflation data and FOMC policy statement, which were sell-the-news events. They are sell-the-news events because they signal a shift in policy that will lead to easing economic conditions and a broader rally in stocks sometime in the future.
The market will experience volatility and turbulence between then and now, seeing many previous leaders fall. The market is heavily concentrated in leaders like NVIDIA (NASDAQ: NVDA) and Microsoft, which are already experiencing some of the largest declines.
The term "safe-haven" refers to stocks with established, resilient businesses, such as consumer staples, that are capable of weathering market volatility. One way to measure that is with beta; the lower the beta, the less volatile relative to the S&P 500 (NYSEARCA: SPY). Because Mondelez has a beta of 0.5x, it is half as volatile as the S&P 500 and is already trading near significant lows and critical support targets, unlikely to fall further.
Cash Flow, Capital Returns, and Value Make Mondelez Worth Owning
What makes Mondelez a low-volatility stock worth holding? Its cash flow, financial health, and capital return. The dividend is only part of the story, yielding about 2.5% at current price points, but it is central to the story. The company pays about half of its earnings in dividends, about 53% of the 2024 consensus estimate, allowing ample room to sustain dividend increases. Dividend increases foster buy-and-hold investing.
Buy-and-hold investing helps to reduce volatility. Aside from the single distribution cut associated with the separation from Kraft in 2012, the company has only increased its dividend and is now tracking for Dividend Aristocrat status. That will reduce volatility further as Dividend Aristocrat-tracking funds and investors buy into the stock. Share repurchases help to provide upward price pressure to the market by reducing the share count; Mondelez's share count fell by 1.7% in Q2 and 1.4% in the first half, and buybacks are expected to continue for the foreseeable future.
Modelez Reports Mixed Results for Q2
Mondelez reported mixed results for Q2, with revenue falling nearly 2% compared to last year and missing consensus estimates. Offsetting factors include the 2.5% organic growth and cash flow efficiency it produced. The company’s GAAP earnings were impacted by non-cash impairments and costs related to ERP implementation. However, the adjusted earnings rose by 25% compared to last year, beating the consensus estimate by a wide margin and sustaining flat cash flow levels despite the top-line weakness. ERP costs will fade over the next few quarters while increasing efficiencies and highlighting growth opportunities, so they are acceptable today.
The analysts' response to the news was promising, ending a string of price target reductions with several raised targets. The takeaway is that MDLZ stock offers deep value trading below the analysts' lowest target, the consensus offers nearly 20% upside, and the sentiment is improving. In this scenario, the price action in MDLZ could begin advancing soon and move up to the consensus $79 before the year’s end, setting a new all-time high.
The price action in MDLZ is favorable to a rebound. The spring sell-off stalled at the critical moving averages, where it shows signs of support. The critical hurdle is the 150-day moving average, which is still above the action. If MDLZ can’t move above that level, it will likely remain range-bound at the current levels. Because the indicators also show support at this level and are set up for a strong trend-following entry signal, that is not expected, and higher prices are likely soon.
