Kraft Foods Group Inc. (NYSE:KRFT), which produces an extensive line of processed foods, beverages and additives, has reported mixed Q2 earnings. A number of companies in its portfolio suffered a decline in earnings, with organic net revenue falling by 1.2% and sales by 1.1%. The figures missed consensus estimates, although a reduction in costs and productivity gains allowed it to post earnings of $0.72 per share. Because the company has suffered due to its post-split product-pruning, the fall in organic revenue perhaps could have been expected. However, the company has shown good growth and innovation potential, thereby managing to stem the decline in its non-core companies and allowing it to report the surprising EPS. Overall, the company's future seems stable and, considering its dividend yield, a good investment for dividend investors.
Kraft's Split and the Road Ahead
Kraft was in the news last year after it split from Mondelez International (NYSE:MDLZ), which left it with a majority of well-known brands in processed foods, while Mondelez retained what can be called traditional "snack foods." However, both companies produce powdered beverages and processed meals, allowing for possible competition. The move appears strategic, since it allows Kraft to focus on its core North American market, while Mondelez focuses on international markets. Both companies compete with Swiss giant Nestle SA (NYSE:NSRGY.PK), which has a good share of almost every imaginable processed-food category, although the pressure is higher on Mondelez because it must compete with Nestle in the international market.
We understand that Kraft has split its reduced range of products into two functionally separate categories, which raises the possibility of another split in the future. For now, the two categories are known as "meals and desserts" (including Cool Whip, Jell-O and cheese meals) and "enhancers and snacks" (A-1 and Bull's Eye barbecue sauces). While the former is a faster-growing segment, the latter provides Kraft with higher margins. The move is being billed as a means for keeping a closer watch on its "favorite" products. In addition to the possibility of another split, there is also a chance that the top brass at Kraft will compare the two categories and decide which product lines need to be combined/discontinued.
Kraft's Performance Post-Split
Now that we have noted the history of the split, it is time to look more carefully at Q2 2013 and compare it with the company's past performance.
Organic Growth Driver
International and Food Service
As seen in the first table, the company reported a fall in earnings in a majority of categories. However, it is interesting to note that the International and Food Service, and Cheese categories have shown growth, since together the two contribute about 42% to annual earnings. The company also has shown steady growth in gross margins, the result of good cost management and productivity gains. Sales are expected to continue to grow, since they are still low.
Kraft Enhances Dividend
Kraft Foods recently increased its dividend by 5%, to 52.5 cents from 50 cents quarterly, marking the first time the company has done so since it became independent. This equates to an annual dividend of $2.14 per share, or 4.0% of the current share price.
ConAgra Foods, Inc. (NYSE:CAG)
Unilever NV (NYSE:UN)
Kellogg Company (NYSE:K)
As seen in the table above, the company offers an excellent dividend yield compared to its competitors.
The Investor's Decision
Although Kraft may not appear to be at a high right now, it should be remembered that the food industry isn't one that is prone to such rises. However, the company has raised its dividend and shows promise of future growth thanks to good cost management and productivity improvements. Further, it is trying to improve its sales, which include some of the best-known brands in processed foods, through aggressive marketing.
Taken together, these points indicate possibilities of future growth and a potential further rise in the dividend. As such, it would be a great investment for investors seeking dividend yields from long-term investments. For those who already hold Kraft shares, the best idea would be to "hold" for now.