Background & Industry of Kellogg’s Bond

Kellogg organization is a multinational American organization. The organization is in the food processing industry and manufacture convenience food and cereal. The headquarters of the organization is in the city of Battle Creek, Michigan. In recent years, the organization has expanded into different parts of the world; due to its expansion, the organization’s profitability and operations have increased. According to 2016 statistics, the organization employs 33,577 people. (Higgins, 2007)

Financial Leverage Ratios of Kellogg’s Bond

The financial leverage ratios determine the capital structure of the organization and indicate how the organization has leveraged its assets. There are two ways through which organization finance its activities: equity financing and debt financing. The financial leverage ratio analysis of Kellogg’s corporation shows that the organization is financed from both debt & equity.

Financial Leverage of Kellogg’s Bond

The financial leverage ratio (debt to asset) of the Kellogg’s corporation is high indicating the organization is highly leveraged. In 2013, the financial leverage was 5.43 which increased to 7.39 by the year 2016 (Morningstar, 2018). A high financial leverage indicates a huge debt burden which is matter of concern for the organization. It is suggested that the organization should focus on its debt so that its capital structure can become more stable and cost of capital can be reduced (Morningstar, 2018)

Debt to Equity Ratio of Kellogg’s Bond

                The debt to equity ratio of the Kellogg’s corporation has increased over the years indicating the level of debt of the organization has also increased. In 2013, the level of debt was 2.13 which rose to 3.54 by 2016 (Robinson, Henry, Pirie, Broihahn, & Cope, 2015). The increase in level of debt can cause financial problems because this amount must be repaid unlike the amount of equity. The high financial leverage, however does not mean that the organization is unable to pay return on the bonds because the corporation is still generating profit (Investing.com, 2018).

Interest Coverage Ratio of Kellogg’s Bond

                The interest coverage shows the ability of the organization to pay interest payments on their loans. The interest coverage ratio of the Kellogg’s corporation indicate that the organization can easily pay their interest over the amount of the loan. In 2013, the interest coverage ratio was 4.95 which rose to 8.23 in 2017 (Morningstar, 2018). Interest coverage ratios show that the organization are in their position to pay return on the bonds (Investing.com, 2018).

Bond Performance of Kellogg’s Bond

                Yield to maturity similar to current yield. It is calculated by dividing cash inflow of bonds by market price. However, the yield to maturity provides the present value of bonds coupon payment. In other words, yield to maturity is the amount of interest which the investor pays on reinvestment of coupon payment. The YTM of K.GG corporate Bond is 4.89. This corporate bond is Callable and its maturity date is 4/1/2031 (Higgins, 2007).

                Another Corporate Bond issued by the organization is K.GL which has a coupon payment of 4.15. The YTM of this bond is 3.307 and the maturity date of this bond is 11/15/2019. If I have to invest in any bond I will invest in K.GL bond because it has low maturity date. Usually investors invest in such securities in which they can earn significant return in less amount of time (Yahoo Finance, 2018). Therefore I would invest in K.GL bond (Robinson, Henry, Pirie, Broihahn, & Cope, 2015).

Stock Performance and Market Ratios of Kellogg’s Bond

The market ratios of the organization provide a brief overview regarding the stock performance of the organization. The 5-year average P/E ratio of Kellogg Corporation is 11.87 which indicates a low-price earnings ratio, meaning investors are expecting low earnings in the future.  The price to sales ratio is 1.63 which is low and needs improvement if the organization wants to attract investors to the organization. The market ratio of the organization is indicating that the company needs to improve its stock performance so that it can increase its equity (Robinson, Henry, Pirie, Broihahn, & Cope, 2015)

Comparison with Industry of Kellogg’s Bond

When the Kellogg’s corporation’s market ratios are compared with the industry, it is evident that their performance in the industry is markedly higher than Kellogg’s performance. Their stocks are not performing well when compared with those in the same industry. Their P/E ratio of industry is 36.07 (Investing.com, 2018).  The price to sales ratio is also lower than market. Therefore, it can be said that the stock performance of Kellogg is not as great their competitors (Robinson, Henry, Pirie, Broihahn, & Cope, 2015)

Historical Stock Prices of Kellogg’s Bond

                The historical stock prices of Kellogg Corporation over a 1-year time frame. In that time period the stock prices have not experienced much fluctuation in prices (Robinson, Henry, Pirie, Broihahn, & Cope, 2015).  Mid-year, the stock process experienced a bit of growth and then again experienced a decline at the end of the year. The lack of fluctuation in stock prices indicate a stable performance and hopefully indicate a rise in the foreseeable future (Higgins, 2007).

In graph related to the trend in stock prices, there is stability in the stock prices. In the future, it is expected that the prices of Kellogg Corporation stock will increase because of improvement in overall profitability (Yahoo Finance, 2018).

Capital Asset Pricing Model (CAPM) of Kellogg’s Bond

The Capital Asset pricing model evaluates the expected return on the stocks. CAPM determines the relationship between expected return and systematic risk. The above table is indicating an expected return on company’s stocks. The beta of Kellogg’s stock is 0.43 and the market return according to S&P 500 is 8 percent (Yahoo Finance, 2018). The risk-free rate is evaluated through 10 years by the US Treasury bond rate. Using the CAPM model, it can be noted that the expected return would be roughly 0.05 (SINHA, 2012).

Dividend Discount Model (DDM)

In table the Kellogg’s corporation stock prices are valued using the dividend discount model (DDM). The future dividend payments are discounted back to determine the value of future stock prices of the corporation. The projected dividends of Kellogg Corporation are listed in the table along with the projected growth rates (Pandey, 2015).

Recommendation for Client of Kellogg’s Bond

After evaluating the debt condition of the organization from various aspects, it is suggested that the client be open to investing in the organization because expect we the organization will earn significant amount of profit in the near future. In recent years, the financial performance of the organization has improved and non-moving in the right direction indicating that they can give significant amount of interest on the bond. It  recommended that the clients invest in bonds & stocks of the Kellogg’s organization to earn profit (Robinson, Henry, Pirie, Broihahn, & Cope, 2015).

Recommendation for Kellogg’s organization of Kellogg’s Bond

The Kellogg organization should focus on its profitability and decreasing the debt structure. The capital structure of the organization needs improvement because too much debt can lead to bigger financial problems since debt is not like equity. The amount of debt must be returned.  Overwhelming debt amount can lead to insolvency if it is not managed accurately. The profitability position of the organization can be improved through increasing the sales (Morningstar, 2018).

Reflection of Kellogg’s Bond

By analyzing the financial ratios and application of CAPM and DDM models, I have learned more information about the bond & Stock performance of the Kellogg Corporation. Through this bond & stock analysis, one can make predict the future direction of the organization. It is important for the investor to evaluate the performance of stocks and bonds before deciding to invest. If an investor does not evaluate the performance of the organization, they can suffer a huge financial loss. This report makes me realize the significance of bond & stock performance analysis from both organization’s and the investor’s perspectives.

References of Kellogg’s Bond

Higgins. (2007). Analysis for Financial Management. Tata McGraw-Hill Education.

Investing.com. (2018). Kellogg Company (K). Retrieved from https://www.investing.com/equities/kellogg-co.-ratios

Morningstar. (2018). Kellogg Co. Retrieved from https://www.morningstar.com/stocks/xnys/k/quote.html

Pandey, I. (2015). Financial Management. Vikas Publishing House.

Robinson, T. R., Henry, E., Pirie, W. L., Broihahn, M. A., & Cope, A. T. (2015). International Financial Statement Analysis, Third Edition (CFA Institute Investment Series) (3 ed.). John Wiley & Sons.

SINHA, G. (2012). FINANCIAL STATEMENT ANALYSIS . PHI Learning Pvt. Ltd.

Yahoo Finance. (2018). Kellogg Company (K). Retrieved from https://finance.yahoo.com/quote/k