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.

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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.

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