Kraft's Confident Buyback Plan

• Email
• Share
• Print

Kraft (NYSE: KFT), a Motley Fool Income Investor recommendation, seems pretty happy with itself these days. In fact, it's so confident in its stock that it's theoretically committed another couple of billion bucks or so toward a new share repurchase program, running through 2008.

I say theoretically because it's possible for a company to halt a buyback initiative, though most companies of this stature usually intend to go through with such plans. But does it make sense for Kraft to be buying back stock?

Back in January, I covered Kraft's annual earnings report, noting that the stock was trading for about $30 a stub at the time. Last September, I had written about Kraft hitting a new 52-week low. The price then? Yep -- about $30 a share. (It later set a new 52-week low of about $27.) And what is the stock trading at these days? If you guessed $30, then you're one Foolish individual.

As you can see, the price hasn't really gone anywhere since I announced my bullish outlook on the stock last fall. At the very least, the company wouldn't be buying back its shares from momentum traders. More important than price, however, is the issue of free cash flow. That's what really decides what a company can and cannot do in terms of adding shareholder value. Does Kraft have enough free-cash-flow potential to dangle the carrot of a buyback in front of its stakeholders?

I'd say so. The company stated back in January that it saw $4 billion from free cash flow and divestitures for all of 2005. For 2004 and 2003, free cash flow came in at approximately $3 billion in each year. Long-term debt at the end of 2004 was $9.7 billion, but fell to $8.5 billion by the end of 2005. With long-term debt decreasing and free cash holding stable (and hopefully increasing), Kraft has solid footing to offer another buyback.

I remain bullish on Kraft as a long-term core holding. (Then again, I also love Ritz crackers and Fig Newtons, so perhaps I'm biased.) Once again, I'll point out the nice yield of 3% and the potential for a practical dividend-reinvestment play. Although I do like increasing dividends better than share buybacks, I certainly have no problem with a couple billion bucks thrown shareholders' way -- so long as it's doable and it makes sense. In this case, I think the answer is yes on both counts.

More on Kraft:

• Kraft Hits New Low
• Kraft: A True Buy-and-Hold?
• I wasn't the only one who noticed the share buyback -- one of the Fool's crafty community members was also on the case.

Motley Fool Income Investor can help you get paid to invest. Find more deliciously dividend-rich stocks with a free 30-day trial subscription.

Fool contributor Steven Mallas owns none of the companies mentioned. The Fool has a disclosure policy.