Tuesday, September 7, 2010

A High Yielding Food And Beverage Company

Kraft Foods (KFT) is an American staple and was a longtime holding of the Oracle of Omaha for many years. Buffett has been reducing his stake in the foods conglomerate over the past year. Buffett believed that Kraft overpaid for its purchase of Cadbury. So, is Kraft a good buy?

Kraft is the biggest confectioner, food, and beverage company in the world. Kraft is responsible for a number of different food and beverage names. The brand names include A1 steak sauce, Chips Ahoy cookies, Koolaid, Oscar Mayer, Nabisco, Oreo, Planters, Maxwell House, and Stove Top. You name it and this consumer staple sells it.

Kraft may have overpaid for Cadbury but it has not stopped the company from creating revenue. The company made over $40 billion dollars last year and is on pace to earn $48 billion dollars this year. Kraft earned $3 billion dollars in net income last year. The company recently beat analysts’ profit estimates last quarter for the sixth straight time. Kraft increased its cash by 65 percent to $2.85 billion last quarter from a year earlier.

After 5 years of tepid sales growth, sales are up over 20% for the current year. Revenue increased 25% last quarter and earnings grew 13%. The company had an operating margin of 14% and a return on equity just south of 10%.

Kraft’s stock currently sells for just over $30 per share. The stock trades at just under 15 times this year’s earnings. That’s expensive for a company whose earnings are expected to grow 7% for the next 5 years. Kraft has nearly $3 billion dollars in cash and over $30 billion dollars in debt on its balance sheet. Kraft has earned over $ 4 billion dollars in free cash flow over the past year.

The stock does have an attractive dividend yield. Shares of Kraft currently yield 3.80%. This is right in line with the average dividend yield of 3.60%. The payout ratio is 43% which is easily sustainable for an earnings giant like Kraft. The company plans on keeping its dividend unchanged for the foreseeable future. The stock trades at 1.5 times book value and 2 times the projected earnings growth.

While Kraft is a great franchise I would be hesitant to buy the stock at its current levels. There is no real reason to buy the stock at its current valuation. The stock would become attractive again if the company increased its dividend or shares dropped down to $25 a share.

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