I heard Kraft CEO Irene Rosenfeld saying that one of the advantages of the spin-off from Altria (aka Phillip Morris) is that the company would now have a highly valued currency with which to make acquisitions. Monday on CNBC's Squawk on the Street, Rosenfeld said, “As we think about the opportunity to be able to take on more debt, to be able to buy back our shares, to be able to use our stock as currency..." Looks like Kraft Foods is about to go on a shareholder value-creating acquisition spree. Kraft Managers are enthused and aggressive. I wouldn't be surprised if they were eventually to take Nestle's (OTC:NSRGY) spot as the world's largest food consumer foods company.*
And while I wait for this value creation to happen, I get a company that is relatively cheap at a p/e of only 16.5 versus 22 for the industry. I also get to collect a nice 3.25% dividend yield while I wait. What might hurt me? Kraft not being able to hide from tobacco litigation if Altria goes bankrupt (not worth considering), Kraft is not cheap enough that an overall market decline would save it, but that fat dividend and non-cyclical products would provide some protection.
*At Kraft's current market capitalization of $51 billion, they would have to triple in market valuation to catch up Nestle.
Disclosures and Confessions: I own KFT. I am short September $32.50 puts. I have been acquiring Kraft Foods Inc since January 2007. (buying all the way down from $34.00. Additionally, I've bought KFT yesterday at $30.34 (Something that almost never happens - bought the low n the day!) and today at $30.44. I might buy more if the price continues to give me value - read drops. I own Nestle ADRs (OTC:NSRGY). I have owned Nestle since 2003 and have not traded it since 2004.
Because I do not want to sit around hoping more kids smoke or that tobacco continues to not be regulated like a drug, I will not own Altria (MO) for my own account regardless of its value.