This article originally appeared on The DIV-Net December 22, 2008.
Linked here is a PDF copy of my detailed analysis of Kraft Foods Inc (KFT). Below are some highlights from the above linked analysis:
Company Description: Kraft Foods is the largest U.S. branded food and beverage company, and the second largest in the world.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
KFT is trading at a discount to 1.) and 3.) above. Since KFT’s tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, KFT is trading at a slight discount. KFT earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
KFT earned no Stars in this section. KFT has paid a cash dividend to shareholders every year since 2001 and has increased its dividend payments for 7 consecutive years. Last year’s dividend payout was 64%, up from 52% in 2006. Since the increase was in excess of 15 points, a Star is deducted, leaving a net of zero Stars in this section.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to >MMA
KFT earned one Star in this section for 2.) above. The NPV MMA Diff. of the $7,218 is below the $10,000 minimum I look for in a stock that has increased dividends as long as KFT has. If KFT grows its dividend at 7.7% per year, it will take 2 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%. KFT earned a Star since its Years to >MMA of 2 is less than 5 years.
Other: KFT is a member of the S&P 500. Its leading global market position has allowed it to build a strong balance sheet and cash flows. The company has used its cash flow to pay increasing dividends and currently has a generous yield in excess of 4%. Due to the relatively stable nature of the company’s end markets, the stock should benefit from investors looking for defensive or lower-risk investments. Risks include execution of internal restructuring, competitive conditions, higher input costs and possible disappointing consumer acceptance of new product introductions.
Conclusion: KFT earned one Star in the Fair Value section, lost one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of one Star. This quantitatively ranks KFT as a 1 Star-Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $23.49 for KFT’s NPV MMA Differential to increase to the $10,000 that I like to see. At that price the stock would yield 4.77%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $10,000 NPV MMA Differential, the calculated rate is 8.9%. This dividend growth rate is above the 7.7% used in this analysis.
KFT is a strong international brand and has a lot working in its favor. Before purchasing KFT, I would like to see a higher NPV MMA Differential and lower payout ratio (64% in 2007). My buy price for KFT is $23.49.
For additional information on KFT, including its dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in KFT (0.0% of my Income Portfolio) .
What are your thoughts on KFT?