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Kraft Foods Group, Inc. (KRFT) is North America's 4th largest consumer package food and beverage company with revenues exceeding $19 billion.

The company was spun off from Mondelez International on October 1, 2012. The Kraft portion is the high margin grocery business largely in North America; Mondelez International (MDLZ) is the high growth confection and snacking powerhouse with an international footprint. See my recent article about Mondelez International here.

Kraft Brands:

Kraft Brands can be found in refrigerators and pantries in virtually every home across the North American continent. The company enjoys a household penetration of 98% in the US and 99% in Canada.

Most of us are familiar with Kraft products. Some of the Kraft brands have reached iconic status including billion dollar brands like Kraft, Velveeta, Jell-O and Oscar Mayer. Supermarkets, convenience stores and warehouse clubs all also market Kraft multi-million dollar brands like Planters, Maxwell House, Miracle Whip, Kool-Aid, Cheez Whiz, Cool Whip and CapriSun…to name a few.

In this article I will explore the opportunities for future growth as Kraft reinvents itself with a new CEO who outlines a clear direction and new product launches that are already having a material impact on Kraft revenue. Plus I have included sourced comments by outside experts who suggest the 'new' Kraft may be more nimble and focused as a smaller company as well as the benefit of dividend investing in a "recession-proof" established food business.

New Leadership

Leadership can make a real difference in creating a sense of urgency to drive growth and profits in what once was a staid, conservative "no-risk taking" 115 year old culture. Sure, the former Kraft Company was once an innovative, growth-oriented American success story. But the high margin, slow growth North American grocery business needed a change agent and that person might very well be Anthony (Tony) Vernon.

Vernon joined Kraft in August 2009 as Executive Vice President and President Kraft Foods North America. When plans were announced in 2011 to separate the North American Foods business from the international confection and beverage business by means of a spin off, Vernon was designated as the future CEO. He assumed the position when the spin off was completed in October, 2012.

Vernon brings new eyes and a fresh approach to Kraft. His resume is impressive, and interestingly doesn't include a lifetime in the food business. Instead he has a rich background in healthcare, including a stint evaluating biotechnology, pharmaceutical and medical device companies for a private equity firm and before that, 23 years at Johnson & Johnson (JNJ), leading many of J & J's largest consumer brands including Tylenol, Motrin, Pepcid AC, Imodium and Splenda.

CEO Vernon's 2013 CAGNY Presentation

As I learned by reading the transcript of the Kraft presentation to the Consumer Analyst Group of New York (CAGNY) on February 19, 2013, Kraft can avoid the mistakes of the "old Kraft" and can remain strong and relevant to today's consumer plus grow revenue through new product introductions, brand line extensions and invigorated marketing. In the presentation CEO Anthony Vernon outlined his 4-point strategic plan to change the Kraft culture and move the company to a growth platform. I have paraphrased significant points below:

First - Make people the Kraft competitive edge by recruiting top talent, expanding stock ownership through the employee base, and announcing a new early retirement plan and other employee incentives.

Second - "Execute with Excellence" through enhanced supply management AND demand management, along with improving the Kraft sales incentive plan.

Third - Turbo-charge their Iconic brands as characterized below.

Fourth - Redefine efficiency and remain or become the lowest cost and most attractive producer.

It seems to me most corporate plans include people, execution and efficiency. For the purpose of this article, I will focus on the notion of turbo-charging the Kraft iconic brands. This may be where the greatest opportunity for growth lies.

Turbo-Charging Brands

The company realizes it needs to innovate and contemporize because the consumer is squeezed and looking to healthier products or less expensive products. The facts are that at the store level the retailer's private label brands have grown for years while the national brands largely ignored the threat. Plus, new competitors are entering Kraft's higher margin categories, creating new threats.

*The company is committed to increased advertising and marketing. Expenditures on advertising increased to 3.5% of sales in 2012 vs. 2.9% of sales in 2011. Budget increases are continuing into 2013 as sales increase. Increased advertising voice often leads to increased share of market metrics.

* Accept and change the fact that past new product launches did not have the needed marketing support behind them, leading to failure. In addition Vernon charges the past launches were made up of "small ideas" with poor execution.

* The company must change the past culture of "innovation doesn't matter here" to accept that innovation is the lifeblood of the new Kraft.

What have been the initial results since Vernon arrived in 2009? Three $100 million platforms have been successfully launched including MiO, Oscar Mayer Selects, and Velveeta Skillets.

By full year 2012 net revenue from new product innovations grew to 13% of revenue from pro-forma 6.5% in 2009.

Dividends

As the higher-margin portion of the business at the time of the spin-off, it is the intent of the company to offer a superior dividend and annual dividend yield. Currently with the stock trading near an all time high the annual dividend is forecasted to be $2.00 for an annualized yield of 4.10%.

On March 5, 2013 Kraft declared a $0.50 dividend payable April 12th to shareholders of record on March 29th.

According to a report by MarketWatch, Kraft is one of the highest dividend yielders in Warren Buffett's Berkshire Hathaway (BRK.B). In their analysis of Buffett's 13F filing, Berkshire Hathaway reported owning 1.7 million shares of Kraft Foods Group. This report pointed out that the breakup of the old Kraft into two companies may enable Kraft managers to better focus on operations going forward instead of concerning themselves with the needs of a much larger company across a much larger geographic footprint.

As reported by Barron's, bond and income investing expert Jeff Gundlach commenting on dividends on March 5, 2013, suggested investors avoid bank and technology company dividends and instead consider companies such as Campbell Soup (CPB) and Kraft in part because they are largely recession proof.

Summary and Conclusions

I like the idea that new CEO Anthony Vernon can be the needed change agent to invigorate the Kraft business. Clearly, as expressed in the CAGNY presentation discussed above, there is a new, more aggressive playbook at Kraft, communicated by new leadership with a desire to win and grow. Vernon faces up to the mistakes of the past that led to a "think small, take few risks" culture. He also recognizes upside potential if Kraft can successfully leverage its iconic brands and invest in powerful R&D for brand extensions and new product development then launch these new products with strong marketing support to back them up...something Vernon says was missing at the old Kraft.

Following the Kraft spin off I had to ask myself what is the point of owning Kraft if Mondelez International is considered the global growth company. I think the answer is Kraft provides a secure (and significant) 4.1% dividend yield, potential for dividend growth and a solid "recession proof" business with familiar billion dollar brands…a business which is not an international business subject to currency fluctuation or devaluation. I like that the company is right here in the United States where we can keep a close eye on its progress.

Kraft may be suitable for retirees like myself seeking dividend income to supplement retirement income. However, because the stock is trading close to an all time high, it may be prudent for investors to wait for a pullback in the share price to make an initial investment in Kraft.

Source: The 'New' Kraft: Reinventing Itself And Paying A 4.1% Annual Dividend Yield

Additional disclosure: I am not a professional investment advisor, just an individual handling his own account with his own money. You should do your own due diligence before investing your own funds.