Thursday, February 21, 2013

New Purchase - KRFT

I decided to put some money to work, my February purchase is Kraft Foods Group.  KRFT has a dream portfolio of brands in one of my favorite industries: food!  The oddity of this is that I normally choose companies with storied histories of dividend increases.  KRFT and its predecessor (KFT) have been stuck in a freeze for quite a few years now.  This is kind of a weird one.

So why KRFT?

Everytime I go to the grocery store I am reminded why I should own shares of this company.  All you have to do is observe the world around yourself.  You cannot deny the brands this company owns.  Kraft, Oscar Mayer, Mio, Planters, Capri Sun, Cool Whip, and Jell-O among other prominent names.  Here's the deal: under the old KFT, some of these popular brands were put on the back burner.  KFT had even more brands than KRFT has to manage plus KFT had operations worldwide.  KRFT is now free to focus on say lunch meats or cheeses whereas before there were too many moving parts.  KRFT is a big company, but a lot more nimble post seperation.  This was discussed on the recent conference call. 

Management has stated they are targeting mid single digit dividend growth.  The CEO reassured us in the recent conference call.  A 4% yield growing ~5% per year sounds like a good proposition to me!

I lost HNZ in the food space and wanted to add another name to complement my General Mills holding.  Between GIS and KRFT it feels like I own half the food aisle!

KRFT shares are currently undervaled.  Now this might be open to interpretation, but I ran some numbers and came up with a $54 fair value.  Morningstar has it listed as $53.  Historical data is not available.  The forward p/e is about 14 and the yield is about 4.3%

I will have to keep an eye on the debt load and pension.

So I'm getting a wonderful business whose stock price looks to be undervalued.  A yield of 4.3% expected to grow in the mid single digits is quite appealing to a dividend & income investor such as myself.  The dividend growth is not yet proven, so for now I'm going to take management's word but put KRFT on probation.  It will remain a small to medium sized position until it shows me a couple years of dividend growth.  This purchase increases my annual passive income by $54.00

I figured now was a good time to buy a stock since I'm going on leave soon.  I want to focus on beaches and pina colodas, not stocks while I'm on vacation!


  1. Nice buy! That's a great starting yield for management's expected DG. I had been trying to get into GIS but the price just never came down to where I was comfortable buying. KRFT could be a good substitute. I like owning companies that I use their products all the time.

    1. Yep. GIS has really taken off. I had hoped to pick up additional shares around 36 or 37. I don't think that will possible now. We'll have to see how KRFT performs, but I like what I see.

  2. Looks good CI! Hopefully management's expectations are right, and you have found a good value. Can't go wrong with an initial 4.3% yield growing hopefully around 5% per year!

    1. We'll see. If they do increases like they say this one should be great!

  3. How did you come up with $54 fair value ? What numbers did you run ? Thanks