Investors are constantly looking for safe, reliable, income-producing stocks. Kraft Foods Group, Inc. (NASDAQ:KRFT) seems to fit that bill perfectly with its name recognition and 3.5% dividend yield, but is KRFT really the great dividend stock it appears to be?
KRFT produces a number of brand-name packaged foods and beverages that Americans absolutely love. The Kraft name is as much of a household name in the U.S. as Johnson & Johnson (NYSE:JNJ) or Procter & Gamble Co (NYSE:PG).
The problem is Kraft’s products don’t carry the same demand as Johnson & Johnson’s medical devices or Procter & Gamble’s cleaning products. Although Kraft’s products get a higher price tag than their generic competitors, the company can only increase prices on customers so high before consumers will move to the generic product.
Kraft’s most recent earnings statement showed that the company clearly has an issue on its hands with input costs. KRFT’s cost of sales jumped from $11.4 billion in 2013 to $13.36 billion in 2014. Kraft is passing the price difference to customers and that is causing, in Kraft’s words, “volume loss from price increases.”
The fact that the company can not seamlessly pass on price increases to customers without losing sales proves Kraft’s brand is not as strong as the JNJ’s of PG’s of the world. This should be concerning to investors at a time when inputs are moving higher, and especially at a time when the economy in general is slowing or struggling.
KRFT Stock Hindered by Debt
But the big issue for Kraft stock is its debt load. At the end of 2014 KRFT had $8.6 billion in long-term debt. In 2014, the company paid $484 million in interest alone on that debt, after operating income was only $2 billion. Interest expense alone was 22% of KRFT’s operating income.
Worse, Kraft has $1.4 billion of its debt due this year. If the company were to simply maintain sales figures and costs, loan payments and interest alone would eat up all of Kraft’s profits. Now, KRFT can always refinance some debt and kick the can down the road, but the question of how safe Kraft’s dividend is comes into play.
More importantly though, was in 2014 Kraft produced diluted earnings per share of $1.74, but paid out $2.15 per share in dividends. Again, KRFT obviously has cash on hand to pay out a higher dividend than what the company even earned that year, but this is not a sustainable model for years to come.
Lastly, we don’t have a long history of KRFT dividend payments following the Mondelez International, Inc. (NASDAQ:MDLZ) split, so it is difficult to predict how much of an increase investors can expect each year. What we do know is that the dividend only jumped 2.3% last year. But, considering how revenue and earnings have faltered, a few percentage points of increase were all that could be expected.
Due to Kraft’s inability to pass price increases to customers and its high debt, Kraft is a dividend dog. The company currently pays out a 3.4% yield which will likely only dramatically grow if Kraft’s stock price falls. KRFT has too much debt on its books and needs to clean that up before it can really start giving more money back to shareholders. But because of Kraft’s market position and inability to increase prices, it will likely take years for the company’s debt to be cleaned up and that is if we don’t enter into another recession anytime soon.
Bottom line is Kraft stock does not represent a very green pasture.
As of this writing, Matt Thalman owned shares of PG and JNJ. Follow him on Twitter at @mthalman5513.
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