Getting the Most for Your Risk-Adjusted Buck

Get the Most of Your Investment Capital in a Crumbling MarketTwo years ago, when the former Kraft Foods Inc. broke itself up, spinning off its global food and beverage business (now Kraft Foods Group, Inc. [KRFT]), the company renamed itself Mondelez International, Inc. (MDLZ). Now, the company is mostly a global snacks business. The new Kraft Foods Group has done pretty well on the stock market since listing in September 2012; the position currently has an attractive dividend yield of 3.7%.

Large-cap corporate spin-offs are typically highly profitable for shareholders. (See “Top Market Sectors for 2014.”) Despite a slow start, Mondelez has finally broken out of its recent consolidation trend on new operational momentum.

Mondelez sells cookies, snacks, confections, and cheese. Some of the company’s iconic brands include “Cadbury,” “Oreo,” “Nabisco,” “Christie,” and “Trident,” among others.

The Street’s been bidding “safer” stocks recently, and investors liked Mondelez’s news of a restructuring plan and the spin-off of its coffee business, which will net the company $5.0 billion in after-tax proceeds.

Like many large-cap public companies, Mondelez has been buying back its own shares. In the first quarter, it spent $500 million on its own stock at an average price of $34.20 per share. Its two-year stock chart is featured below:

Mondelez International Inc Chart

Chart courtesy of www.StockCharts.com

If you happened to be a shareholder of the former Kraft Foods Inc. then you’ve done well with both spin-off businesses and both stocks remain attractive holds.

Mondelez isn’t offering as much income as the new Kraft Foods Group; its dividend yield is currently around 1.6%. And while top-line growth is always an issue for established large-cap consumer brands, Mondelez is an improving earnings story—that’s what the Street is buying.

All year, the stock market has seemingly been going through an identity crisis, with very choppy action, no particular trend, and very tired trading.

This market looks to be breaking down. With speculative fervor and price momentum diminishing significantly in initial public offerings (IPOs), biotechnology stocks, highly valued technology stocks, and small-cap stocks, recent action is a good reminder that investment risk is a more worthy consideration than expected return.

And while faster-growing companies offer the potential for greater capital gains, owning the right dividend-paying large-caps has proven to be just as good an investment strategy with the added bonus of offering a lot less investment risk.

Sentiment has changed, as evidenced by the trading action in the market’s most speculative stocks.

Big investors are buying less risk currently, and while the stock market shouldn’t fully break down without participation from the Dow Jones industrials and transportation stocks, the risk-adjustment that’s just taken place is likely to be a key theme until the fourth quarter.

Earnings safety and dividends, to a lesser extent, are still what a lot of institutional investors want in a recovery economy that isn’t yet able to sustain its own momentum without monetary intervention.

Stocks like Mondelez and Kraft Foods Group are poised for more gains, even if more speculative issues continue to break down. Dividend paying stocks continue to offer the best bang for your risk-adjusted buck in this market.