, , ,

Losing My Position?

News that Heinz was in advanced talks to buy Kraft last Tuesday night left me feeling ambivalent: I was likely to get a nice premium for my Kraft shares, but then I would probably have to find another home for my capital as 3G Capital and Warren Buffett were likely to pay all cash, as they are wont to do. But Wednesday morning brought news that it would be a merger, with Kraft shareholders getting a $16.50 per share special dividend and 1 new share of Kraft-Heinz for every share of Kraft they currently hold. Importantly to me, they expressed the intent to “maintain Kraft’s current dividend per share, which is expected to increase over time.”

The market was a bit confused by the offer at first, because one had to make some assumptions to figure out a valuation as most of the compensation was in the form of 3G and Buffett’s combined private ownership of Heinz.

After some time passed to digest the details, Morningstar took up their fair value estimate substantially, and there was generally positive reaction to the deal (here and here), given the amazing success of 3G’s management team in terms of under-promising and over-delivering on their cost cut targets with their Heinz buyout.

I Love Buffett, But I Love Dividends More

Warren Buffett is an intellectual hero of mine, as I have learned much from his pronouncements over the years. But I don’t currently own any Berkshire shares because I am partial to receiving dividends, both because I live off of the cash flows from my portfolio and I am more suited to dividend investing, as dividends from high-quality, defensive businesses smooth out the psychological trauma of riding the market roller coaster, and tend to deliver long-term total returns that are competitive with the S & P 500 over full market cycles. But I manage for total return. I want a reasonable entry price, a safe yield, and good prospects for dividend growth that should drive long-term total returns.

I’m kind of pinching myself that I get to go into partnership with Warren Buffett, get the amazing management of the 3G Capital guys, and get a substantial and growing dividend in addition. With 3G’s promised $1.5 billion in cost cuts (which looks very likely to be achieved and even exceeded given their history with Heinz), the valuation looks reasonable.

But What About The Yield?

Using Friday’s market closing price for KRFT of $89.10 as a starting point and subtracting the $16.50 per share special dividend to be received upon closing of the deal in the 2nd half of the year, gets you to an ex-dividend price of $72.60. Given that they intend to continue and grow the regular KRFT dividend of $.55 per share per quarter, that works out to an ex-special-dividend yield of 3.03%.

This looks very attractive to me. And after the deal, Buffett and 3G Capital have the potential to do more rollups in the food industry to drive further long-term value creation (I also own GIS). So I bought more shares of Kraft on Friday.

The Future Looks Bright

So, in short, I get to partner with Buffett, receive a 3% and growing dividend, and I get access to the best management team in the industry in 3G Capital. I don’t know about forever, but this seems likely to be a very successful long-term holding to me. And did I mention I get paid 3% in the meantime? What’s not to like?

Other Reads:

Dr Ed: Old Age Doesn’t Kill Bull Markets, Recessions Do

The Latest Memo from Howard Marks on Liquidity

A Dozen Things Taught by Warren Buffett in his 50th Anniversary Letter

Berkshire Hathaway 50th Anniversary Letter

Credit Suisse Global Investment Returns Yearbook 2015