Wednesday, March 25, 2015

Kraft and Heinz to Merge

This morning, Kraft and Heinz announced plans to merge their businesses. The new company will be one of the top three North American food brands by sales. Kraft shareholders will get 1 share of the new entity PLUS a special dividend of $16.50/share and a commitment to maintain the current KRFT dividend (with growth) going forward. As a KRFT shareholder, I love this kind of merger!
What makes mergers like this so great for the shareholders that get the special dividend is the following:

  • I liked KRFT yesterday, before the merger announcement, at $60-62/share. I own 200 shares that I purchased in the $50-55 range. What's changed?
    • I now get 1 share for each KRFT share of the merged company, a more diversified, more global entity.
    • PLUS a special dividend of $16.50/share just for being involved. 
  • Thus, even if the deal doesn't work out as well as planned - or as well as KRFT could have done on its own, my position is SIGNIFICANTLY de-risked! 
    • My purchase price (actual money out of my pocket) is reduced by $16.50. 
    • Meaning, it's as if I bought KRFT shares for $35-40. 
    • Instead of my original $10,500 of money invested in the company, I now have only $7,200 invested after the $3,300 special dividend.
  • My yield-on-cost was about 4.0% with my ~$52.50 purchase price. Adjusted for the special dividend, my new yield-on-cost is 6.1%. Think of how many years of 5-7% growth it would take to achieve this level! (The answer is about 9 years).
So I'm a happy KRFT shareholder today. I get the same dividend going forward with a more diversified, more global portfolio of premier brands PLUS $16.50/share in my pocket.

I'll be crushing my goal of earning $16,000 of dividends with this unexpected $3,300 of dividends. I still have quite a bit of buying to do to hit the go-forward goal of $20,000 by the end of 2016 as special dividends aren't recurring. Nonetheless, I'm enjoying today's victory.

4 comments:

  1. BGH,

    That is what I am talking about!!! Since I own 75 shares, I will receive $1237 which about doubles what I lost from the ESV cut. This is a great way to get the day started.

    Congrats and best wishes in hitting 20k in forward dividends!

    MDP

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    1. Yessir. Great start to the day. Good stuff recovering the ESV cut...even if it is a one-time benefit. I think over time, there are quite a few one-timers that, across a broad portfolio, can almost be thought of as recurring.

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  2. Too bad I own very little KRFT. I love this deal for shareholders and I love the new combined company. Great brands that should continue to churn our solid growth decade after decade. Would love to see KRFT shares dip for some reason so I could add more but I doubt that will happen. Although if Mr. Market decides to get a bit crazy we could maybe get a arbitrage situation and still own an excellent company.

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    1. PIP,

      Even owning a bit of KRFT is a win. And I agree that the new company will be a wonderul growth machine for decades. We can only hope for some irrationality in the market - whether for KRFT or another solid company.

      Best wishes!

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