By Chad Brand of The Peridot Capitalist
With the Altria (MO) spin-off of Kraft Foods (KFT) completed on Monday, there has been renewed selling pressure on Kraft shares as investors shed their newly claimed small position in the company. Such negative price action will likely be a short term phenomenon, at least as far as it’s relation to the spin-off, so a contrarian investor should be asking, "Is this near-term weakness an opportunity?"
The way I see it, not really. The one thing Kraft does have going for it is a fat 3.2% dividend yield, but other than that, there really isn’t much to like. Buying a stock just for its dividend doesn’t really make much sense when you can earn more in a savings account. As you can see from the five year chart below, Kraft shares have been underperforming the market for a long time, so bargain hunters may be drawn to the name.
However, despite the poor performance, Kraft shares are not cheap. At the recent price quote of $30 and change, they trade at 17 times 2007 profit forecasts. For a company that is growing sales at a low single digit rate annually, and whose earnings are projected to be flat between 2006 and 2008, the stock doesn’t at all look like much of a value play, despite what the yield and the five year chart might have you believe.
Full Disclosure: No position in KFT at time of writing
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