Fitch affirms most Kellogg ratings

by Eric Schroeder
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CHICAGO — Fitch Ratings on July 14 affirmed several ratings for the Kellogg Co., including the company’s long-term issuer default rating, senior unsecured debt and bank credit facility, all at A-. The ratings service also maintained its stable outlook for the Battle Creek, Mich.-based company.

“Kellogg’s ratings incorporate its leading market share positions, strong brand equities and solid operating earnings growth,” Fitch said. “The ratings are also supported by the company’s clear and balanced financial strategy, as well as its ample liquidity and consistently high margins for the packaged food industry. The company is well-diversified geographically, with nearly 40% of 2009 sales generated outside of the United States. However, approximately half of Kellogg’s sales are in the cereal category, and the company’s significant product concentration in the breakfast category is a risk that is factored into the ratings.”

Fitch said that although Kellogg’s top-line growth has slowed it is still within the company’s long-term guidance and as such expects low single-digit growth going forward. Retail cereal sales, meanwhile, have slowed considerably, growing by less than half a point, versus unusually strong 6% growth last year.

“Kellogg may continue to have near-term pressure on cereal sales due to its June 2010 voluntary recall of certain children’s cereals due to a packaging odor,” Fitch said. “The financial impact has not been disclosed, but is not anticipated to be material to Kellogg’s credit ratings.”

Cost-savings initiatives are expected to outweigh cost pressure, leading to improved gross margin in 2010, Fitch said. Additionally, the ratings service said it anticipates operating earnings growth above the company’s long term target of mid-single digits, excluding possible negative impact from the cereal recall.

Fitch estimated Kellogg’s 2010 free cash flow (cash flow from operations less capital expenditures and dividends) should exceed $600 million.

“Despite making a large pension contribution of $451 million in 2008, free cash flow has averaged approximately $520 million annually over the past four years,” Fitch said. “Kellogg’s net share repurchases averaged approximately $465 million annually in 2006 through 2008. Since then the company has scaled back on share repurchases, executing net share repurchases of $56 million in 2009 and $74 million in the first quarter of 2010.

In April 2010 Kellogg announced a $2.5 billion share repurchase authorization for 2010 through 2012. The bulk of the share repurchases are likely to be toward the latter part of that timeframe, which may result in a material decrease from the company’s previous guidance of $1.1 billion of share repurchases in 2010.”

Fitch anticipates that the current share repurchase authorization will be executed in a conservative manner.

Kellogg also announced an 8% dividend increase with the third quarter of 2010 payment.

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