Kraft Foods Freezes Dividends: Should You Take Any Action?

Kraft Foods Inc. (KFT), together with its subsidiaries, manufactures and markets packaged food products and grocery products worldwide. The company has consistently raised dividends since it went public in 2001. It was a part of tobacco conglomerate Altria Group (MO), until Kraft was spun off in May 2007.

As a company whose management shared the values of Altria group (MO) to consistently reward shareholders with dividend increases and share buybacks, Kraft (KFT) has attracted the interests of many dividend investors. While it has raised distributions for only seven consecutive years, many investors didn’t see this as a problem, but believed that the company would soon join the ranks of the elite dividend achievers.

Just last week the company announced that it has would leave its current dividend payment of $0.29/share unchanged for the fifth consecutive quarter. In addition to that there were no share repurchases in first quarter 2009, and the company’s authorization to repurchase shares expired on March 30, 2009.

The major news about Kraft has been its attempted takeover of Cadbury (CBY). The board of directors of Cadbury has rejected the offer so far, citing the fact that it undervalues the company. Other issues related to this takeover would include competing bidding from rivals Nestle or Hershey (HSY). This could make the acquisition of Cadbury (CBY) pricier than initially expected, and Kraft might have to pay top dollar if it really wanted to own the British based confectionery company.

Prominent dividend companies which are typically engaged in mergers and takeovers of a large proportion and which end up overpaying might need a lot of cash fast. Thus freezing or cutting the dividend payment should not be an uncommon factor in such situations.

The deal would definitely be accretive to Kraft and its owners in the long run. If the merger with Cadbury were completed, Kraft Foods would expect to revise its long-term growth targets to 5+% for revenue and 9-11% for earnings per share, from its previously announced 4+% and 7-9% respectively. If it overpays however, those estimates not only might have to be revised downwards, but it would be Kraft’s shareholders that would ultimately pay the price in terms of dividend cuts or freezes.

I was planning on initiating a position in Kraft before the announcement on September 8, but I would wait for the acquisition to unfold before I take any action. The company has four more quarters where it can afford to keep the distributions unchanged. Should it increase them within that time frame and also should it manage to earn approximately $1.95-$2.00/share in 2009, I would consider initiating a small position there. Without any dividend growth, even the best yielding stock would eventually erode your purchasing power due to inflation.

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