Kraft Foods: Earnings Down Opportunity Up

Kraft

Kraft Foods’ most recent earnings report printed a drop in operating income of 37.5 percent, but this comparison to a one-off quarterly bump last year related to an employment benefit-plan adjustment should not serve as a black mark on the investment opportunity the stock now offers investors. Kraft has a portfolio of the world’s most valuable food brands, extensive distribution expertise, and industry leading quantities of coveted shelf-space in food retailers. It also sports a dividend yield after the recent drop of more than 3.8 percent based on the most recent closing price.

In October, 2013 Kraft Foods Group split into two companies, believing that shareholders would value the sum-of-parts higher than the whole. Mondelez International became the name of the company responsible for the portfolio of fast growing global snack brands, while the name Kraft Foods was retained by the portion of the business focused on the more mature North American market. Particularly after the recent drop, Kraft Foods remains a relatively safe investment for investors seeking a combination of income and growth.

Historically, companies in the “consumer staples” sector have been less volatile, higher yielding, and more consistent than most sectors in the S&P 500. These characteristics are driven by the relative inelasticity in demand for products that people use every day. Kraft Foods’ portfolio of brands includes Kraft Cheese, Oscar Mayer, Velveeta, and Maxwell House coffee in addition to many other well-known household staples. The consistency with which people buy these products makes the revenue and earnings growth of companies like Kraft Foods predictable, which in turn makes their dividends safe, and attracts investors looking for additional opportunities to invest in fixed-income like products, rather than bonds. With bond yields at generational lows, this trend toward seeking income from equities rather than debt is likely to stay.

Ten year U.S. Treasury bonds are currently yielding slightly less than 2.49 percent. Not only are yields at that level not keeping up with inflation, and hence not protecting the purchasing power in constant dollar terms of investors choosing to place them in their portfolios, they are also likely to increase in the near future. When bond yields increase, their prices drop. This is because a bond is a legal agreement to pay out a fixed stream of income for the duration of its life. Naturally, if yields are to rise, and the income stream is to remain fixed, the price will have to drop. With the Federal Reserve likely to continue tapering its quantitative easing measures, as it has done consistently for almost a year, most investors believe that it is only a matter of time before bond prices begin to fall.

This danger is in large part what makes an investment like Kraft Foods an interesting opportunity, despite the one-off earnings drop. Corporations have the ability to raise product prices in line with inflation at their discretion. In turn, this means that over time they will be able to raise their dividend, and as nearly 200 years of public market equity history shows, likely their stock prices as well. While U.S. Treasury bonds are widely considered to be the safest investment in the world because of the government’s ability to print money, consumer staples companies like Kraft Foods are unlikely to go out of business for the foreseeable future. With a current dividend yield of more than 130 basis points higher than Treasuries, Kraft Foods deserves a look by investors.

Opinion by Benjamin A. Buchanan

Sources:

Kraft Foods

Forbes

CBS News

TheStreet

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