Kraft Foods Group, Inc. (KRFT) operates food and beverage businesses in North America including convenient meals, refreshment beverages and coffee, cheese and other grocery products. On August 1, 2013, the company reported second quarter earnings of $1.38 per share, which beat the consensus of analysts' estimates by $0.72. Since last writing about the company the stock is down 4.74% and is losing to the S&P 500, which has gained 5.24% in the same time frame. With all this in mind I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying more shares of the company right now for the consumer goods sector of my dividend growth portfolio.
The company currently trades at a trailing 12-month P/E ratio of 17.17, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 16.56 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.15), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 14.96%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 14.96%.
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 3.76% with a payout ratio of 65% of trailing 12-month earnings (or 80% of free cash flow) while sporting return on assets, equity and investment values of 8%, 38.7% and 13.7%, respectively, which are all respectable values. The really high return on equity value (38.7%, tops in the Major Diversified Foods industry) is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry (for comparison purposes Lancaster Colony (LANC) sports a ROE of 26.6% and WhiteWave Foods (WWAV) sports a ROE of 12.3%). Because I believe the market may get a bit choppy here and would like a safety play, I believe the 3.76% yield of this company is good enough for me to take shelter in for the time being. The company does not have a long history of raising its dividend, but raised it by 5% just this week.
Looking first at the relative strength index chart [RSI] at the top, I see the stock muddling around in middle ground territory with a value of 48.4 with no trajectory. To get some direction I will look at the moving average convergence-divergence [MACD] chart next and see that the black line is below the red line with the divergence bars flattening out in height, indicating the stock has been going nowhere for the past week or so. As for the stock price itself ($53.22), I'm looking at $53.38 to act as resistance and the 200-day moving average to act as support for a risk/reward ratio, which plays out to be -2.36% to 0.3%.
- On 01Oct13 the company announced a $0.525 per share quarterly dividend with an ex-date of 09Oct13 and pay date of 25Oct13. This increased dividend represents a 5% increase from the prior $0.50 per share dividend.
- The company announced Teri List-Still will succeed Timothy McKevish as Chief Financial Officer starting first quarter of 2014. Teri comes from Procter & Gamble (PG) with about 20 years of experience in different financial leadership roles.
Warren Buffett recently reduced his stake in the company 88% from 1,602,061 shares to 192,666, but that does not bother me. To me the company is fairly valued based on future earnings and growth. Financially, the dividend payout ratio is middle of the road based on trailing 12-month earnings and high on free cash flow. I don't doubt management will be able to continue to increase the dividend going forward. Based on future earnings the dividend payout ratio stays around 65.4% (if the dividend is kept steady). The technical situation of how the stock is currently trading is telling me it's consolidating and may be poised for a move up. The company has a high return on equity, high near-term growth rate, and good potential to keep increasing the dividend. It's because of these reasons I will layer a small position here at these current levels.
Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!