Why You Should Invest In Kraft Food

| About: The Kraft (KHC)


Kraft Foods Group is a better investment option for dividend-seeking investors.

The current valuation of Kraft Foods makes it attractive as its forward P/E ratio of 16.21X is likely to increase from the current P/E ratio of 12.31.

Kraft Foods needs to push hard into the emerging market for the sake of future growth as the company expects headwinds from the North American market.

The stock of Kraft Foods Group (KRFT) has gone up 25.2% since mid-2012 and is currently trading at $55.64 per share while in comparison the S&P 500 went up 27.2% over the same period. Mid-2013 Kraft Foods' stock greatly outperformed the S&P 500 as the company's stock increased 26.7% whereas the S&P 500 went up 17%. After that Kraft Foods' stock growth slowed down in comparison to the S&P 500. However Kraft Foods entered 2014 with a good start as its year to date stock price increased 4% while in comparison the S&P 500 increased by 0%.

Source: NASDAQ

Kraft Foods' brand portfolio consists of many of the most popular food brands in North America including two brands with annual net revenues exceeding $1 billion each. The company's brand portfolio includes Kraft cheeses, dinners, and dressings and Oscar Mayer meats, plus over 25 brands with annual net revenues between $100 million and $1 billion each. Kraft Foods new fiscal year start is quite good and backed by solid performance during fiscal year 2013. Kraft Foods derives 32% of revenue from cheeses and dairy sales followed by 15% from meat and meat alternatives, 11% from meals, 10% from refreshment beverages and 9% from enhancers 9%. The company focused on cheese and dairy products to improve revenues and has been quite successful as this segment's revenue is increasing by 1% each year.

Source: Annual Report 2013

Earnings Results and Continued Headwind from North America

The net revenue for Kraft foods grew 2.3% in the fourth quarter but declined 0.3% to $18.2 billion in fiscal year 2013. Fourth-quarter organic net revenues increased 3.2% were driven by volume/mix gains of 4% that were partially offset by negative 0.8% due to lower pricing that primarily reflected lower costs for ingredients such as raw nuts and coffee beans.

For the full year the revenues were almost flat as lower pricing was offset by favorable volume/mix. Despite the flat top line the bottom-line growth was pretty impressive as the operating income increased 71.9% to $4.6 billion in 2013. For the fourth quarter the operating income was $1.5 billion and this includes a $782 million benefit from market-based impacts to post-employment benefit plans primarily driven by higher discount rates and higher asset returns.

The net income of $2.72 billion increased by 65% compared to the previous year. The healthy net income resulted in a diluted EPS $4.51 compared to the $2.75 diluted EPS in 2012. This significant increase is due to market-based adjustments to the post employment benefit plan. However excluding those gains the EPS grew by just 3.3%. Despite that for fiscal year 2014 Kraft Foods expects strong results backed by a steady performance in 2013.

Kraft Foods' highly depended on the emerging markets to accelerate significant growth due to the saturation of the North American market. Its revenues from the emerging markets increased at a CAGR of 18.4% while revenues increased by a more modest growth rate of 1.5% in the North American grocery business. For fiscal year 2014 Kraft Foods expects headwinds in several of its business segments in North America which will be a big concern for investors.

Dividend Profile and Earnings Estimates

There is not too much to talk about the dividend history of Kraft Foods as the company paid two annual dividends after the spin-off. However the dividend growth and dividend yield increase are solid points to consider when making the decision to invest in Kraft Foods. Kraft Foods paid its first dividend of $0.50 per share for fiscal year 2012 and the resulted yield was 1.10% which might not be impressive but is quite reasonable when keeping in mind the spin-off. The second dividend of $2.05 per share for fiscal year 2013 with a dividend yield of 3.80% reflects an impressive increase of 310%. Obviously this dividend growth rate is not sustainable but an initiative to bring the dividends at a reasonable level for the sake of future sustainable dividend growth is required.

Consensus estimates include an EPS of $3.20 in 2014, $3.47 in 2015 and $3.76 in 2016. This results in a growth rate of 8.4% in 2015 and 2016. For the next five years the earnings growth for Kraft Foods is expected to slow-down to 7.05%. To maintain the previous dividend level Kraft Foods must increase the dividend payout ratio to 64% from 45.2% in 2013.

Kraft Foods is now Trading at an Attractive Valuation Multiple

By the end of 2013 Kraft Foods' stock was trading at a P/E ratio of 17X that was higher than Kellogg's (NYSE:K) P/E ratio of 15X. However, due to strong earnings growth and a comparatively lower stock price increase the stock is now trading at an attractive trailing twelve months P/E ratio of 12.3X compared to Kellogg's P/E ratio of 13.24X and the industry average P/E ratio of 17.4X.


  1. As far as price appreciation is concerned, Kraft Foods does not possess a lot of price growth potential due to its modest earnings growth for the next five years. However from a dividend perspective Kraft Foods looks attractive as its dividend yield of 3.77% is much better than Kellogg's dividend yield of 2.8 and the 1.63% dividend yield of Mondelez International (NASDAQ:MDLZ). Furthermore, Kellogg's earnings growth for the next five years will be around 5.64% lower than Kraft Foods' earnings growth of 7.05% over the same period. This makes Kraft Foods a better investment option for dividend investors as the company is in a favorable position to increase and sustain future dividends compared to its competitors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.