Kraft Stock Analysis

Kraft Foods Group (KRFT) is one of the smaller holdings in my portfolio.  I purchased my initial position in the company several months after the spin-off.  A year and a half later, I wanted to perform an updated stock to assess whether I should maintain my current position or purchase additional shares.  It was time to run Kraft through the Dividend Diplomats Stock Screener!

About Kraft

You cannot walk through a grocery store without seeing a Kraft product on every shelf.  The company owns some of most recognizable names: Maxwell House, Jell-O, A.1, Cool Whip, Crystal Light, Kool-Aid, Lunchables, Oscar Meyer, Planters, Valveeta, and so on.  Due to its portfolio of name brands, the company owns 10 brands that have $500m in sales and are present in 98% of all households* .

In 2012, Kraft Inc. decided to split its business into two companies and spun-off its global snack business, Mondelez International Inc.  The former company now trades as two independent companies, Mondelez (Ticker: MDLZ) and Kraft Foods Group (Ticker: KRFT).  Kraft’s CEO since the spin-off, W. Anthony Vernon, was the former Executive Vice President of the company’s Mondelez International and was the former President of Kraft Foods North America**.  The company seems to be in experienced hands since Vernon has had management experience at both of the old company’s major brands.  To me, it is important to have a CEO that understands the product very well and has had experience with the  intricacies of Kraft.

Since the spin-off two years ago, the stock price has climbed from $43 per share to an all-time high of $60.60 earlier this year (A 40.9% gain).  The stock has been trading around this recent high and has fluctuated in the $59 range during the writing of this analysis.  At the end of 2012, I initiated a position in KRFT buying 20 shares at $44.70 per share. I have been a major benefit of the stocks post-spin-off appreciation and I am looking to possibly invest more of the company.

Risks

It seems that there are two major risks facing Kraft going forward.  First is the rising cost of food.  If you have purchased any meat products recently,  you will have noticed the costs have increased during the first half of the year.   For a variety of reasons, the costs are expected to increase over produce and other grocery items as certain areas of the country are hampered with droughts and fuel prices continue to rise.   An increase in raw materials will cause Kraft’s cost of production to increase.  Second, through review of recent filings and earnings releases,  the company is re-branding many of its products.  There is a risk that the re-branding may not prove as successful as anticipated, which could impact future earnings.

Dividend Diplomats Stock Screener

How does KRFT currently stand compared to the market and its competitors? Let’s find out by running KRFT through our stock screener.  For comparison purposes, we will compare Kraft against one of its competitors in the Major Diversified Foods industry,  ConAgra. Foods (Ticker: CAG).  While performing the analysis, I will reference the most recent Q.  The most Q was Kraft’s first quarter of the fiscal year and ConAgra’s third quarter of the fiscal year.

1. Price to Earnings Comparison.  Kraft’s trailing twelve month  EPS is about 13.15, which is well below the S&P P/E Ratio.  The company is projected to have declining earnings per share in the current year, which is the main driver for the higher Forward P/E Ratio and the Forward Annualized Q P/E.  While the earnings are still projected to be solid,  I would imagine the decrease is due to the increase cost of products that have been impacting the manufacturers of food products and all consumers this year.   However, even with the projected impact,  the forward P/E ratios are still lower than the current S&P ratios..  ConAgra on the other has a much high trailing twelve month P/E ratio.  While the P/E ratios based on projections have brought the ratios closer to the current market values,  the high TTM P/E ratio makes me a little nervous.  I tend to shy away from companies with that large of a disparity between projected earnings and recent earnings (especially when the projected earnings are much higher than the recent periods)  because of all the assumptions/changes/decisions/etc. that must  fall favorably for the company in the current year.    Based on this and with all other facts considered, I believe Kraft is the more favorable company and passes the first metric.

Kraft PE Ratio Comparison

2. Payout Ratio.  Last year, Kraft had a payout ratio of 45% (Dividends paid $2.05; diluted EPS $4.51).   However, the Q1 payout ratio increased to 61% as the company’s earnings have declined since the end of the fiscal year.  Our typical threshold for dividend paying stocks is 60%, so Kraft just barely exceeds this limit.  While this is not a major issue,  I do not like to see a company’s payout ratio increase without the company raising its dividend. Tthe current dividend does not seem as if it is in danger based on management’s dividend strategy (More to come on this topic),  but it is something to monitor if the company’s earnings suddenly decrease in the period.    On the other hand, CAG has a lower payout ratio as their payout ratio at the last Q was 44.6%.   While both companies have payout ratios that indicate the dividends are sustainable, the advantage belongs to CAG based on its lower current payout ratio.   However, I am not scared off from Kraft because the payout ratio is one percent higher than our typical screener.

Kraft Payout Ratio

3. Dividend Increases. For this metric, I am going to pass on comparing the history of dividend increases to Conagra because the new Kraft has only been publicly trading since Fall 2012.  Most recently, the company increased their dividend 5%.  This has been the only increase since the spin-off.  I wanted to gather more information about Kraft’s dividend strategy to gain comfort over the company’s future dividend, so I went digging through the company’s investor relation page to find any dividend information.  From a presentation to shareholders of the new Kraft Food Group shareholders in fall of 2012***,  management mentioned that the will use their Free Cash Flow to fund a competitive dividend that consistently grows at a rate in the high single digits.   It appears that management has delivered on this dividend approach in its short dividend history with the 5% increase.  Maintaining a dividend growth rate greater than inflation is critical to pass our third metric, and it appears that management plans to maintain the current growth level (if not increase the rate) in future periods.  Thus, I conclude that Kraft has passed the third metric at the moment.

Summary

Based on the analysis,  I will be initiating an additional position in Kraft this week for $875.  Kraft proved to be a favorable investment through our screening process even with a payout ratio of 61% during the first quarter.  The company is trading at a discount to the market and one of its competitors when using the P/E ttm.  In addition, while the dividend history is short, management seems committed to delivering a solid dividend to shareholders.  When the Mondelez was spun-off in 2012,  Mondelez was viewed as the lower value growth stock while Kraft was viewed as the higher yielding income stock.  I expect a nice dividend from the company going forward that will continue to grow annually.  Who can pass on that?   In addition to our screening analysis,  my portfolio is not particularly heavy in this industry.  Like most dividend portfolios,  my portfolio has a large allocation to oil,  utilities, and REITs.  Kraft would increase my position in a non “Big 3” industry.  Lastly,  I am a big fan of Kraft’s brand portfolio and I love the fact that you can find many of their products in every pantry.

What are your views on Kraft?  Is anyone waiting for a lower entry point before pulling the trigger on a Kraft purchase?

Thanks and I would appreciate any feedback on the Kraft stock analysis!

Bert

DISCLOSURE: I DO NOT RECOMMEND ANY DECISION TO THE READER or ANY USER, PLEASE CONSULT YOUR OWN RESEARCH. THIS IS ACTUAL DATA, ANALYSIS, HOWEVER I BASE NO INVESTOR RECOMMENDATION.  THANK YOU FOR YOUR UNDERSTANDING.

Sources used in analysis:

*Source of facts: www.kraftfoodgroups.com
**Source of CEO Background:  Kraft DEF14A company filing per www.edgar.sec.gov

***Source of Dividend Information:  Kraft Food Groups Investors Day Presentation per the company's investor relation website
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5 thoughts on “Kraft Stock Analysis

  1. As a kid, I loved kraft’s mac and cheese. But as an “adult” I prefer annie’s mac and cheese. It just taste fresher. I haven’t look at the company based on that bias. Maybe I should though, thanks!

    Cheers,
    Henry

  2. Kraft seems pretty solid. Its seems like a very safe slow stock with measured growth. Wish their dividend was just a bit higher but I wouldn’t want to see them increasing their payout much more than it already is. But long term outlooks quite good and its a good core stock to have in ones portfolio.

    Good Day and Grind On!

    • thanks for stopping by Asset-Grinder. It reminds me a lot of PG in the sense that it is not a sexy stock, but it will slowly trend upwards. I am interested to see their earnings release at the end of the month. If earniings are a bit lower than expected, they may be forced to increase their dividend in a smaller increment than their high single percent growth target due to their high payout ratio. The interesting wildcard is the equation is that the new Kraft has only been around since 2012, so we do not have a large sample of dividend increases to study. Maybe management’s payout ratio tolerance is higher than mine.

      Bert

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