Snacking on Kraft (KFT): A Solid Dividend Payer

Back in May the large cap food company announced another solid quarter with a 4% revenue increase compared to the year-ago period, despite rising cost of sales. Even through a weak economy, Kraft has managed to generate growth by boosting prices, cutting costs, introducing new products and removing underperforming ones. Net revenues for the company’s “power brands” which include Oreo cookies, Trident gum, and Cadbury Dairy Milk chocolates saw a 4.5% increase. The company also made some favorable projected earnings for the years ahead. Projected earnings for 2012 and 2013 are $2.52 and $2.78 respectively. It’s track record of beating analyst projections for its last four quarters isn’t too shabby either.

Compared to its competitors, Kellogg, General Mills, Campbell Soup, and Nestle, Kraft has been faring pretty well in terms of facing market share pressure from customers converting to private labels. Truth is, Kraft holds under its belt numerous brands that have become household names consumers simply cannot do without. In fact, statistics tell us that over 80% of revenues come from products that hold the No. 1 share position in their corresponding categories and over 50% of revenue is driven by categories where market share is twice the size of their closest competitors.

Kraft’s iconic brands, which include Cadbury, Nabisco, Oscar Mayer, and Oreo, generate substantial revenue of over a billion dollars annually. More than forty of the company’s cherished brands have been in existence for over a century. Additionally, because of the diverse portfolio of products the company holds, eighty of its other brands contributed more than $100 million each in revenue in 2011.

Many have also made Kraft’s spin off and split into two companies an investment case. Last summer, Kraft announced its plan to split current operations into two distinct entities: a global snacks business with high growth and a high margin North American grocery business. The global snacks business will consist of the current Kraft Foods Europe and Developing Markets units, along with the North American snacks and confectionery businesses. U.S. beverages, cheese, convenient meals, and groceries, along with non – snack categories in Canada will be included in the North American grocery business. Kraft plans to separate its financial statements for Q2 of 2012 and finalize the spin off before the end of the year.

Nonetheless, it is unlikely that the North American grocery business will see rapid growth. It is more likely that it will generate solid cash flows and solid profit margins. Additionally, Kraft plans to introduce a generous dividend payout for this business.

The other side of story is the growth story of Kraft’s international snack foods business, aka Mondelez. In Russia and China alone, biscuit sales were up about 40% in 2011. For chocolate sales in developing markets, numbers were also well up into the double digits. Europe and developing markets together saw contributions to revenue go up 44%, but North America’s contribution fell by 20%.

Overall, Mondelez will focus on gaining market share in high growth markets with high margins, and the North American business will focus on maintaining market shares, improving margins, and paying solid dividends to shareholders. From an investor’s perspective, Kraft represents a steady, low risk dividend investment for the long term.

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