A Very Strong Dividend From An Unexpected Place

This spin-off offers the highest dividend in the foods space and it also has growth opportunities.

Apr 23, 2014 at 1:15PM

Spin-offs are great sources of underfollowed investments. They also tend to outperform the broader market--the Claymore Beacon Spin-Off ETF has outperformed the S&P 500 by over 100 percentage points over the last five years. One of the more underrated spin-offs is Kraft Foods Group (NASDAQ:KRFT).

An underrated spin-off that offers an impressive dividend
Although it kept the "Kraft" name, Kraft Foods Group is still a spin-off. Back in 2012, Kraft Foods spun-off its North American grocery foods segment, which is now Kraft Foods Group. The remaining part of Kraft is now known as Mondelez International (NASDAQ:MDLZ).

Kraft Foods Group is the fourth largest food and beverage company in North America, behind the likes of PepsiCo and Coca-Cola. Its key brands include Kraft, Maxwell House, Oscar Mayer, Planters, and JELL-O. Oscar Mayer and Kraft generate more than $1 billion in annual revenue each. Another 25 brands generate annual revenue of between $100 million and $1 billion each.

One key area for growth
Kraft Foods Group sells its products to the largest retailer in the world, Wal-Mart (NYSE:WMT). These sales account for over 25% of Kraft Food's revenues. A strong Wal-Mart is good for Kraft Foods, thus the fact that Wal-Mart is looking to attract more customers is a big positive for Kraft.

First, the retail giant is getting into the organics business. It will now offer Wild Oats brand products in its stores. This should help attract new customers who should incidentally buy some of Kraft's products.

Another key growth area for Wal-Mart is its plan to open smaller stores. This will make Wal-Mart accessible to more people and get Kraft's products in front of more shoppers. It plans to open up to 300 of these smaller stores, which it dubs Neighborhood Markets, this year. Over the same period it only plans to open 115 supercenters.

Kraft Foods Group is also increasing its exposure to millennials, who are one of the largest growing shopper bases. The millennials are also focused on convenience, which is what the Neighborhood Market stores provide. Kraft has introduced new health-focused products to capture the health-conscious consumer. These include Planters NUT-rition and Oscar Mayer Selects.

Kraft doesn't have much abroad, as it gets around 15% of its revenues from outside the U.S. This is the one downside to Kraft as the company does lack exposure to some of the faster-growing emerging markets. Thus, it's relying more on its partners in the U.S.

How Kraft's shares stack up
When we compare Kraft Foods Group to its major peers, it's cheaper and pays a much higher dividend. Kraft Foods Group's dividend yield is 3.7%. Mondelez's yield is 1.6%, PepsiCo's is 2.7% and Coca-Cola's is 3%. Kraft Foods Group's dividend yield is actually well above the industry average of 2.2%. Kraft trades at a P/E of 12.4, which is well below the food-processing industry's average P/E of 25. Meanwhile, Mondelez is trading with a P/E above the industry average at 27.

Toward the end of last year, Kraft increased its dividend payment by 5% and authorized a brand new share buyback program for $3 billion. This is just under 10% of the company's market cap and it is the first buyback program since the spin-off. Buybacks should be a great way for the company to put its $1.7 billion in cash (or around 5% of its market cap) to work.

Bottom line
Kraft Foods is one of the more overlooked dividend investments. It has a strong portfolio of brands that will support its current dividend, but new product introductions could drive its growth even higher. Although the foods business isn't quite as sexy as some high-growth tech names, Kraft Foods Group is still a solid investment for investors looking for a relatively high dividend yield.

3 stocks poised to be multi-baggers
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. Our analysts have found multi-bagger stocks time and again. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of Coca-Cola and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers