Worst of all, the board of directors announced their intention to cut dividends to shareholders by 36% to 40 cents/share. This bad publicity soured investors appetite for the company, which sent shares tumbling to all-time lows.
As part of my process, I sell after a dividend cut. This is why I do not own Kraft Heinz anymore. I did want to share my experience with the stock however, in an effort to show you that even when things go wrong, you can still do ok as an investor. I know that a lot of naysayers will use the Kraft Heinz dividend cut to scare you about dividend investing. I just wanted to provide some perspective.
Back in April 2010 I bought Kraft Foods (KFT) at a little over $30/share. This was the company that was a spin-off from Phillip Morris in 2007. Unfortunately, Kraft ended up freezing dividends, which is why I did not add more shares in the future.
In October 2012, Kraft Foods (KFT) split into two companies. One was called Mondelez International (MDLZ), while the other one was renamed to Kraft Foods (KRFT).
For every share of Kraft Foods (KFT), I received one share of Mondelez International (MDLZ). For every three shares of Kraft Foods (KFT) I received one share of new Kraft (KRFT).
In 2015, Heinz announced its intention to purchase Kraft (KRFT). As a result, I received a share of Kraft-Heinz (KHC) as well as a one-time dividend of $16.50/share.
Fast forward to the dividend cut that was announced after the market closed on Thursday, February 21, 2019. When the stock opened on Friday, February 22, 2019, it traded at $35.85/share. I was able to sell shortly after the open at a price that was a little over $35/share.
However, I also had one share of Mondelez at the close of business on Friday, which sold for a little over $47.50/share. Share prices are approximations, because the prices at which an investor bought or sold would have varied a little depending on the time of day that they bought or sold. The end result is not materially different, hence I do not want to show perfect precision ( share prices are influenced by the fear and greed of the fallible human beings creating these share prices, so they definitely lack precision and rationality in most cases anyway). The price at which you or I buy and sell will vary from person to person. However, the cash dividend is the same for everyone who owns one share of a stock.
An investment in April 2010 of $30 turned out to be worth a little over $59 ( 1 share of Mondelez and one-third share of Kraft Heinz). I would say that doubling the value over a period of 9 years is not a bad return – approximately 8%/year.
However, this calculation doesn’t even include dividends received throughout the years. As most of you are aware of, I do not automatically reinvest dividends for several reasons. The article today adds another reason – risk management. I used all dividends received from Kraft, Kraft Foods, Kraft-Heinz and Mondelez to be added to new cash I invested, and allocated to new investments I have made over the past nine years. This increased my portfolio diversification, and reduced my risk.
Kraft Foods had managed to grow its annual dividends for several years in a row. Unfortunately, at the end of 2009 it kept dividends unchanged. I was hopeful that this is a temporary measure, which is why I invested in the stock.
Unfortunately, by the end of 2010 it was obvious that its dividend streak will end. Hence, I never added to the stock again. But between 2010 and 2012, the Kraft Shareholder would have received $3.19/share. This figure is adjusted for the fact that the first quarterly payment in 2010 was not received due to the purchase being done in April.
2010 | 2011 | 2012 | |
KFT | $ 0.87 | $ 1.16 | $ 1.16 |
As I discussed above, the shareholder received one share of Mondelez (MDLZ) in late 2012 and one third of a share of Kraft (KRFT), for every share they owned of legacy Kraft Foods (KFT).
In the case of Mondelez (MDLZ), you can see that for each share an investor could have generated $4.26 in cash dividends between 2013 and 2018.
2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |
MDLZ | $ 0.54 | $ 0.58 | $ 0.64 | $ 0.72 | $ 0.82 | $ 0.96 |
In the case of Kraft-Heinz a shareholder would have received $9/share between 2015 and 2018. Since the investor owned 1/3 of a share, they ended up with $3 in cash dividends.
2015 | 2016 | 2017 | 2018 | |
KHC | $ 1.70 | $ 2.35 | $ 2.45 | $ 2.50 |
In the case of Kraft Foods, shareholders received $22.30/share in dividends between 2013 and 2015. This figure includes a special dividend of $16.50/share, paid to Kraft shareholders ahead of the acquisition by Heinz in 2015. Since the investor owned 1/3 of a share, they ended up with $7.40 in cash dividends.
2013 | 2014 | 2015 | |
KRFT | $ 2.03 | $ 2.13 | $ 18.15 |
In total, you can see the total dividend income received by year, after combining all the tables above:
2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |
Dividend Income | $ 0.87 | $ 1.16 | $ 1.16 | $ 1.22 | $ 1.29 | $ 7.26 | $ 1.50 | $ 1.64 | $ 1.79 |
So by last Friday, a shareholder would have received $17.88 in cash dividends between 2010 and 2018. This means that the investor in Kraft from 2010 would have recovered almost 60% of their original purchase price in dividends alone.
Of course, the shares they received were worth roughly $59.20/share by close of business on Friday, February 22, 2019. This is almost a double from the $30/share paid in early 2010.
If we add in the amount of dividends and shares owned, we end up with a total value of $77, which is a decent gain from an entry price of $30/share in 2010.
This is why I am going to ignore any naysayer who uses the dividend cut at Kraft-Heinz to scare you out of investing in dividend paying stocks. There is a high chance that this naysayer overdosed on papers from finance PhD’s and ended up buying emerging market funds or foreign stock funds in 2010, in order to fight their home bias. Just for reference, an investment in any of the international stock market funds in April 2010 would not have not as well as an investment in Kraft during the same period of time.
Conclusion
Today we learned several important lessons. The first lesson is that just because a company stumbled on its bad luck, that doesn’t mean that its shareholders cannot do well financially over a period of time.
The second lesson is that holding shares for a long period of time can increase the odds of a successful return on investment.
The third lesson is that dividends represent a return on investment and a return of investment. In the case of Kraft, the original shareholder received almost 60% of their purchase price through a dividend rebate. In addition, they also ended up doubling their money on capital gains only, by owning stock worth roughly $59/share.
The fourth lesson is that valuation does matter. When Kraft was purchased in early 2010, it yielded close to 4% and sold for roughly 15 times earnings. Even if the company had never increased dividends, and the stock price didn’t go up, shareholders would have generated a 4% return on their investment. This is a very good margin of safety where you are in a position of “heads I win, tails I do not lose too much”.
The fifth lesson is to be diversified, and to be a long-term investor. While this example could have easily led to losses, it is important to remember that to succeed, you need to put the odds in your favor. This means selecting quality companies at good valuations, being diversified, and maintaining proper risk management techniques.
A sixth lesson is to not follow anyone’s advice blindly. While I didn’t invest in Kraft because of Buffett in 2010, I know some may have invested in Kraft-Heinz (KHC) partly because the Oracle of Omaha was involved. I know that some investors bought Kraft-Heinz because it had some legendary names such as Warren Buffett’s Berkshire Hathaway, as well as the superstar team at 3G Capital involved. Just a couple of years ago, there was a lot of great coverage of that investment. The conclusion is always to do your own research before investing. Even the best investors in the world make mistakes on a large portion of their investments. You never know if you are following them into one of their mistakes or one of their best investments. If you did not do the work to form an opinion on a company, you would not know whether to buy more, to simply hold or whether to sell.
Thank you for reading!
Relevant Articles:
- Kraft Foods freezes dividends
- Stock Spin-Offs – What Should Dividend Investors do?
- Margin of Safety in Dividends
- Dividend Reinvestment – Automatic versus Manual