Kraft spinoff, How do you get investors to sit up and take notice of a soon-to-be spun-off stock? If you're Kraft Foods, which will spin off its slow-growth North American grocery business to shareholders on Oct. 1, you pay a big dividend.
The new Kraft Foods Group (ticker: KRFT) will offer a 4.5% yield, based on when-issued trading in the shares late last week. That's the highest yield among major food companies—most are in the 3% range—and is in line with the dividend rate on utilities and other traditional income sectors of the stock market.
Thanks to its high dividend, new Kraft most likely will have one of the highest valuations in the food group, trading for more than 17 times projected 2013 profits, compared with 14 to 16 times earnings for the likes of Campbell Soup (CPB), Kellogg (K), Heinz (HNZ), and General Mills (GIS).
With its lofty price/earnings ratio, new Kraft doesn't look as appetizing as its rivals. Kraft's payout ratio will be much higher than its food peers, which could limit dividend increases in coming years. It may be better to buy shares of Kellogg or General Mills—both yield about 3.3% and have a lower P/E and better dividend-growth prospects.
If its high valuation persists, Kraft could attract imitators in the food industry, as companies figure they can boost their share prices with an ample dividend. Consumer-staples producers tend to pay out about half their earnings in dividends, while new Kraft's payout ratio will be nearly 80%, based on projected 2013 profits.
New Kraft's dividend looks safe, thanks to the stability of its well-known brands, which help give the stock its bond-like 4.5% yield at a time when 10-year Treasury notes yield under 2% and Kraft's own 10-year debt yields less than 3%.
Kraft (KFT) is separating into new Kraft and the larger Mondeléz International (MDLZ), which will hold the company's global snacks business, including Nabisco cookies, Cadbury chocolate, and Chiclets gum. New Kraft's portfolio includes some familiar American products like Jell-O, Kool-Aid, Velveeta, Planters, Oscar Mayer, Kraft macaroni and cheese, and Kraft refrigerated cheeses. Until Tuesday, new Kraft will trade in a when-issued market with the ticker KRFTV, and Mondeléz as MDLZV . Old Kraft shares will stop trading after the split.
Mondeléz will have a more modest dividend, around 2%. In an indication of the importance of dividends in a yield-parched environment, Mondeléz has a P/E ratio similar to new Kraft's, despite a stronger growth outlook. Mondeléz looks more appealing than new Kraft.
Kraft announced the split a year ago, as a way to highlight its high-growth snacks business, following its controversial $20 billion purchase of Cadbury in 2010, a deal that angered Kraft's most prominent shareholder, Warren Buffett, the CEO of Berkshire Hathaway (BRK.A). Buffett felt Kraft overpaid, and he criticized Kraft's tax-inefficient move to sell a pizza business to fund the Cadbury deal. Berkshire has steadily sold Kraft shares. It had 59 million as of June 30, versus 130 million at the end of 2009.
Cadbury is an important part of Mondeléz, a made-up word that suggests the French word "monde," or world, overlapping "deléz," which Kraft calls a "fanciful expression" of the word "delicious."
Kraft holders will get one share of new Kraft for every three shares of old Kraft, and the old Kraft will be rechristened Mondeléz. In when-issued trading Friday, Mondeléz fetched about $26 a share and new Kraft, $45. Old Kraft traded Friday at around $41, equivalent to the value of one share of Mondeléz and one-third of a share of new Kraft.
In investor presentations recently, managements of new Kraft and Mondeléz disappointed Wall Street by projecting a lower-than-expected 2013 profit, but the positive surprise was Kraft's intended annual dividend of $2 a share. Kraft shares initially dropped on the earnings guidance, but have since recouped those losses, mostly because investors are assigning a higher-than-expected value to new Kraft, based on its lofty dividend.
New Kraft expects profit of $2.60 a share, and Mondeléz projects $1.50 to $1.55 for 2013. New Kraft and Mondeléz both fetch around 17 times 2013 estimates.
Mondeléz is targeting 5% to 7% organic annual revenue growth and double-digit gains in profit (excluding the impact of foreign-exchange moves). New Kraft is aiming for more modest "mid to high" single-digit annual earnings gains. Mondeléz's ambition is to be viewed like higher-growth consumer companies, such as Coca-Cola (KO) and Colgate (CL), rather than slower-growth food producers.
Kraft bulls like Robert Moskow of Credit Suisse like the Mondeléz story, arguing that next year's profits could be held back by a couple of special factors, including currency, and that Mondeléz's profits could rise sharply in 2014 to $1.80 a share. Joe Cornell of Spin-Off Research last week assigned a Buy rating to Mondeléz, with a $29.50 price target, about 12% above the when-issued share price. He has a Hold rating on New Kraft, with a target of $44.25.
The new Kraft Foods Group (ticker: KRFT) will offer a 4.5% yield, based on when-issued trading in the shares late last week. That's the highest yield among major food companies—most are in the 3% range—and is in line with the dividend rate on utilities and other traditional income sectors of the stock market.
Thanks to its high dividend, new Kraft most likely will have one of the highest valuations in the food group, trading for more than 17 times projected 2013 profits, compared with 14 to 16 times earnings for the likes of Campbell Soup (CPB), Kellogg (K), Heinz (HNZ), and General Mills (GIS).
With its lofty price/earnings ratio, new Kraft doesn't look as appetizing as its rivals. Kraft's payout ratio will be much higher than its food peers, which could limit dividend increases in coming years. It may be better to buy shares of Kellogg or General Mills—both yield about 3.3% and have a lower P/E and better dividend-growth prospects.
If its high valuation persists, Kraft could attract imitators in the food industry, as companies figure they can boost their share prices with an ample dividend. Consumer-staples producers tend to pay out about half their earnings in dividends, while new Kraft's payout ratio will be nearly 80%, based on projected 2013 profits.
New Kraft's dividend looks safe, thanks to the stability of its well-known brands, which help give the stock its bond-like 4.5% yield at a time when 10-year Treasury notes yield under 2% and Kraft's own 10-year debt yields less than 3%.
Kraft (KFT) is separating into new Kraft and the larger Mondeléz International (MDLZ), which will hold the company's global snacks business, including Nabisco cookies, Cadbury chocolate, and Chiclets gum. New Kraft's portfolio includes some familiar American products like Jell-O, Kool-Aid, Velveeta, Planters, Oscar Mayer, Kraft macaroni and cheese, and Kraft refrigerated cheeses. Until Tuesday, new Kraft will trade in a when-issued market with the ticker KRFTV, and Mondeléz as MDLZV . Old Kraft shares will stop trading after the split.
Mondeléz will have a more modest dividend, around 2%. In an indication of the importance of dividends in a yield-parched environment, Mondeléz has a P/E ratio similar to new Kraft's, despite a stronger growth outlook. Mondeléz looks more appealing than new Kraft.
Kraft announced the split a year ago, as a way to highlight its high-growth snacks business, following its controversial $20 billion purchase of Cadbury in 2010, a deal that angered Kraft's most prominent shareholder, Warren Buffett, the CEO of Berkshire Hathaway (BRK.A). Buffett felt Kraft overpaid, and he criticized Kraft's tax-inefficient move to sell a pizza business to fund the Cadbury deal. Berkshire has steadily sold Kraft shares. It had 59 million as of June 30, versus 130 million at the end of 2009.
Cadbury is an important part of Mondeléz, a made-up word that suggests the French word "monde," or world, overlapping "deléz," which Kraft calls a "fanciful expression" of the word "delicious."
Kraft holders will get one share of new Kraft for every three shares of old Kraft, and the old Kraft will be rechristened Mondeléz. In when-issued trading Friday, Mondeléz fetched about $26 a share and new Kraft, $45. Old Kraft traded Friday at around $41, equivalent to the value of one share of Mondeléz and one-third of a share of new Kraft.
In investor presentations recently, managements of new Kraft and Mondeléz disappointed Wall Street by projecting a lower-than-expected 2013 profit, but the positive surprise was Kraft's intended annual dividend of $2 a share. Kraft shares initially dropped on the earnings guidance, but have since recouped those losses, mostly because investors are assigning a higher-than-expected value to new Kraft, based on its lofty dividend.
New Kraft expects profit of $2.60 a share, and Mondeléz projects $1.50 to $1.55 for 2013. New Kraft and Mondeléz both fetch around 17 times 2013 estimates.
Mondeléz is targeting 5% to 7% organic annual revenue growth and double-digit gains in profit (excluding the impact of foreign-exchange moves). New Kraft is aiming for more modest "mid to high" single-digit annual earnings gains. Mondeléz's ambition is to be viewed like higher-growth consumer companies, such as Coca-Cola (KO) and Colgate (CL), rather than slower-growth food producers.
Kraft bulls like Robert Moskow of Credit Suisse like the Mondeléz story, arguing that next year's profits could be held back by a couple of special factors, including currency, and that Mondeléz's profits could rise sharply in 2014 to $1.80 a share. Joe Cornell of Spin-Off Research last week assigned a Buy rating to Mondeléz, with a $29.50 price target, about 12% above the when-issued share price. He has a Hold rating on New Kraft, with a target of $44.25.
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