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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


April 17th 2009 Kraft
NYSE Symbol: KFT
Industry: consumer brand
Price as of 4/17: $22.67

Even in these tough times, there are blue chip defensive companies maintaining or raising their dividends. In the last several months, I've featured eleven companies that have raised their dividends in the last year. The list includes 3M, McDonalds, Travelers, Kimberly Clark, Heinz, Caterpillar, P&G, Sysco, Valero Energy, Abbott Labs, and Coca Cola. This week I'll feature a twelfth blue chip, S&P 500 company that raised their dividend last fall. The featured stock of the week is the newly minted Dow Jones Industrial inductee, Kraft Foods. Kraft is the largest packaged-food manufacturer in the U.S., boasting the brand names that are entrenched in American culture. Kraft isn't immune to the economic downturn, lowering estimates last quarter. Earnings are now expected to be flat year over year, yet the stock has dropped 35% in the last seven months. The pull back in this blue chip defensive play has pushed its dividend yield up over 5%, providing a great entry point for income investors.
Beleaguered by a bureaucratic operating structure and a stagnant pipeline, Kraft has been undertaking a massive turnaround to revamp its pipeline and create a more nimble corporate structure. However, these gains have been offset by the run-up in raw materials and ingredient costs along with the rising U.S. dollar. To combat that, Kraft's move to raise prices to offset these higher costs in the face of a deteriotating economic environment last year. The results have not been pretty.
Kraft's stock has underperformed its leading competitors, like Kelloggs and General Mills, but its offers more upside and a superior dividend yield, twice the yield offered by the 10-year Treasury.
The stock trades for 12 times earnings, 11 times 2010 earnings, 0.8 times sales, and 1.5 times book value. As one money-manager put it, the stock is trading at a historic low, the yield is at a historic high, and the expectations are low. Their largest shareholder, Warren Buffet would agree.