3 Reasons Kraft Foods Group Isn't a Top Dividend Stock

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In 2012, Kraft Foods died. Then, like a delicious phoenix, Kraft Foods Group  and Mondelez rose from the ashes. The new Kraft is focused on selling packaged food in North America, while Mondelez takes on the rest of the world. With a household brand name and a 3.95% dividend yield, Kraft Foods is a tempting treat for any dividend investor.

In its first year on its own, Kraft did pretty well. The company generated a boatload of cash, paid out a nice dividend, and ended up with a massive pile of cash and a larger pile of debt. So how does this all add up for the potential dividend investor? Let's find out.

Yes, that's a candy corn cake with Oreos around the edge.http://www.kraftrecipes.com/recipes/candy-corn-cakes-138538.aspx Source: Kraft.

Cash and debt will define us all
Kraft got a huge helping of debt when the companies split. The business now has $8.6 billion in long-term debt, which it is paying off as it comes due. That hasn't been a problem, as free cash flow landed at $454 million for the first six months of the year and Kraft has a solid pile of cash to dip into, if need be.

Even so, that recurring payment is cutting into the cash the company can return to investors. With a constant drain on cash, Kraft has opted to keep more cash back for potential purchases. In the last earnings conference call, CEO Tony Vernon noted that the merger and acquisition environment has "heated up" and that Kraft is evaluating all options.

Being ready to pounce on new opportunities means holding cash in reserve, especially since the company would have a hard time issuing new debt with its current high levels. That's another mark against paying out more in dividends or buying back more shares. On that note...

Buybacks are treading water
Due to Kraft's stock taking a trip north, options have been exercised at a higher rate than normal. Even though the company spent $235 million on stock repurchases in the first half of the year, total outstanding shares barely budged. Kraft issued 3.1 million shares on the back of options, putting a huge dent in the 4.2 million that it bought back.

As the stock climbs and debt payments keep taking a chunk out of available cash, expect total shares outstanding to remain relatively constant. That means any increase in dividend payments is going to have a direct, negative impact on Kraft's cash. Instead of dropping overall payments through repurchases, Kraft is in a position in which it can only watch the total payout increase.

This is one more reason the business is likely to keep dividend payments at their current level for a while.

Kraft owns all the brands
The discussion of Kraft wouldn't be complete without pointing out that the business is rock solid and an American staple. The list of brands that Kraft owns borders on silly -- Jell-O, Planters, Kraft, Grey Poupon, Oscar Mayer, Miracle Whip, and on and on. These brands enabled Kraft to generate $9.1 billion in sales over the first six months of the fiscal year.

Despite spending a chunk of its earnings on debt payments, buying back shares to stay level with its outstanding share count, and paying out a dividend, Kraft remains healthy. Dividend investors look for many different things in a company, and Kraft could be a good option for people who want to sleep soundly at night, knowing the business they've invested in is built on a strong foundation.

On the other hand, Kraft's cash commitments mean it's simply not in a place to prioritize dividend payment increases. With a five-year plan that doesn't even pay off half of its long-term debt, it's difficult to say when the cash will start flowing back to investors in a meaningful way. With that uncertainty, it just doesn't make sense to call Kraft one of the best divided stocks on the market. We can do better.

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The article 3 Reasons Kraft Foods Group Isn't a Top Dividend Stock originally appeared on Fool.com.

Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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