Kraft Has the Right Recipe for the Long Run by Malcolm Berko on Creators.com

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Kraft Has the Right Recipe for the Long Run

Dear Mr. Berko: In mid-February, when you recommended Ralcorp at $59 per share, you never wrote a word about Kraft. I bought 150 shares of Ralcorp, but now I would like your opinion on Kraft, which is two points lower than it was in February. Would you recommend a $10,000 investment for the medium term? Also, I have a $200,000 certificate of deposit coming due. I would like to invest this CD money in another CD for four years to get a 4 percent return. But I need to know if the government will renew the new $250,000 level of Federal Deposit Insurance Corp. insurance. Thank you. — C.T., Des Moines, Iowa

Dear C.T.: Well, hells bells and buckets of blood, last February when I fossicked around my haversack for a food stock I didn't care for Kraft Foods Inc. at $27, but instead chose Ralcorp Holdings Inc. (RAH-$60). Since mid-February, RAH crawled to $64 and settled back to $59-$60 and Kraft (KFT-$25) settled at $25. I recommended RHA because I believed it had a more attractive balance sheet and income statement.

I'm not an aficionado of the RAH food line, but I am an enthusiastic serial abuser of Kraft's Crystal Lite, Oreo and Nabisco cookies, Philadelphia cream cheese, Velveeta, Post cereals, Oscar Mayer and KFT's marshmallow creme fudge. A couple of U.S. Army guys tell me how much they use and appreciate Kraft's shopping site for members of the military. However, I am unimpressed with Kraft's website, which is molasses slow in downloading consumer data.

In 2009, KFT is expected to produce $42 billion in revenues. The shares should earn $1.90 this year and $2.05 in 2010. Its $1.16 dividend yields a swell 4.6 percent, and the dividend could be increased to $1.22 in the coming 12 months. I like that dividend.

During the past 18 months, management has invested in various and substantial restructuring efforts to improve global leverage and reduce high cost structure. Management has reduced its work force, consolidated many of its facilities and eliminated slower growing, less profitable products — such as juices, flavored water, hot cereal brands, etc.

— which haven't carried their weight in profits. Management will sell many of these brands and reinvest the proceeds in new product development and focus marketing on core brands. KFT must raise prices, too, because its commodity costs are increasing.

However, as consumers rein in food costs to less expensive products, KFT's volume will come under pressure and the road ahead might be a bit lumpy. But KFT's great balance sheet and its attractive dividend make this an easy issue to hold for the long haul as investors wait for restructuring efforts to improve performance.

Meanwhile, Citigroup, Davenport and UBS all have five-star rankings on KFT, and Warren buffet owns 9 percent of the company and added millions of shares to his position in March 2008 at $30. However, I will also tell you that Buffet bought millions of shares of General Electric Co. (GE-$11.70) in October 2008 at $22.

KFT isn't going to be a hot stock that you can sell a year or so later at a good profit. KFT is basically a core holding for conservative income and growth investors that should have less volatility than the general market.

Not to worry. The FDIC $250,000 per account insurance on bank deposits set to expire late this year has been extended to 2013. The decision to extend the insurance cap to $250,000 is evidence of its popularity and indicates that the new cap will become permanent.

However, I think that a $200,000, 3.2 percent CD for four years could be a bad financial decision. I can give you 11 reasons why you shouldn't tie up that $200,000 at 3.2 percent for four years, not the least of which is that interest rates could rise later this year, and will certainly go up in 2010. Put just 30 percent of your $200,000 in the 3.2 percent CD for four years and ladder the remaining $140,000 in six-month increments.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.