Stock of the Week
Nasdaq Symbol: KRFT
Industry: Food and Beverage
Price as of 10/12: $47.10
The major averages have been on a roll with the S&P 500 up 18% year to date. However this run is getting a little long in the tooth. Over the next two weeks, earnings season will tell us if this bull run has more room to the upside. Entering earnings season particularly after a long run, it's wise to be cautious. This week, we'll highlight a blue chip consumer staple company that spun off into two companies. The stock of the week is Kraft Foods. Stock spin offs have worked great in this tough environment. Just this year Conoco Phillips spun off their refining business, Phillips 66. Not only did Conoco maintain their dividend boosting the yield to 5%, but Phillips 66 also initiated a dividend after the stock had run up 30% year to date. The Kraft spinoff could have a similar story to tell. After such a strong run up in the major averages ahead of earnings, a consumer staple stock may be the safe play for the rest of the year.
With the start of the fourth quarter, Kraft Foods completed its spinoff of its international snack business creating two separate companies, both of which are publicly traded. Kraft Foods kept its US food and beverage business under Kraft Foods Group (KRFT) while the International snack business was spun off into Mondelez International (MDLZ).
Barrons recently highlighted the spinoff suggesting the Mondelez stock has double digit growth potential due to their direct operations in India and China. Operating in two of the world's highest populated countries will provide Mondelez with ample consumers to help drive sales over the long term, and in turn net income. The Barron's article also looked into the Kraft Foods division indicating the US food and beverage side should continue its slow and steady growth, but the best part of the Kraft Food stock is the dividend. With the announced spin off, Kraft indicated they would provide a $2 annual dividend for a 4.4% yield, better than the previous dividend from the combined company. Following the spinoff, Kraft's new stock rose nearly 10% before pulling back. Following the spinoff, the analyst at Stifel Nicolaus initiated Kraft with a Buy and a price target of $49 saying the new company should continue to see solid upside potential for earnings from the business due to the strong margin growth potential, and cost cutting.
The combined companies issued one last dividend at the end of September before the spin off so neither company will issue a dividend anytime soon. But heading into what could be a volatile earnings season, Kraft and Mondelez should provide a safe solid dividend play particularly if investors flock back to the defensive sectors.