America’s big-name food companies have traditionally been generous dividend payers. That may be changing, however, as activist investors call for belt-tightening at one of the food giants whose name doesn’t exactly roll off the tongue, but whose familiar products line our cupboards.
Just look at what’s gone on in recent weeks.
Spotlight on Mondelez
At the start of the month, William Ackman’s Pershing Square Capital Management disclosed its $5.5 billion stake in Mondelez International Inc. (MDLZ ), the successor to one part of Kraft, and home of Nabisco, Cadbury, Trident and Tang. Ackman has said he believes that Mondelez should be bought by The Kraft Heinz Co. (KHC), the new food giant created in July through the merger of the ketchup king and the parts of the old Kraft company that were not rolled into Mondelez. Kraft Heinz is controlled by Warren Buffett’s Berkshire Hathaway and 3G Capital Partners LP, which is owned by the Brazilian Warren Buffett, billionaire Jorge Paulo Lemann.
A few days after Ackman’s announcement, Kraft Heinz reported that second-quarter pre-merger sales at both companies had fallen. Profits rose on the Kraft side of the house, due to cost-cutting already under way, while Heinz reported a loss. Later that week, Kraft Heinz said it was cutting 2,500 jobs as part of an effort to slice an additional $1.5 billion in expenses.
The efforts remind me of a song that so aptly describes what activists do. The ditty is “The Merry Old Land of Corporate Raiders,” music by Harold Arlen, lyrics by Evan Cooper, with special thanks to Yip Harburg: “Cut, cut, cut; trim, trim, trim, add bunches of IOUs. That’s how we get our big returns — we really turn the screws.”
Over at Kraft Heinz
Activists have a point in that there’s probably tons of fat to cut at Kraft Heinz, maker of Velveeta. After all, big companies get bloated over the years, and slicing off a few layers probably won’t affect things operationally one whit. Of course, lots of the money that now goes to pay the people who will be fired — and who will probably never find new jobs that pay as much as they’re earning now, or maybe any job at all — will wind up flowing into the pockets of the company’s top management and its billionaire owners. Let’s hear it for efficiency!
But what are mature food companies, with mature profitable products made of cheap ingredients and artificial colors, supposed to do? We all love the junk they make, but unless the food giants figure out a way to make us like ketchup on donuts, we’ve probably reached the upper limit of our consumption.
So since revenue growth will be tough to accomplish, cost-cutting will be the best road to profit enhancement. And what better cash-consuming “cost” to cut than dividends? Mondelez, yielding 1.5% at the moment, isn’t a huge dividend payer, but Kraft Heinz, at 2.9%, offers an attractive payout.
If the activists push for changes that result in greater profitability shared by all stockholders through higher dividends, that could be great. But if they decide to load up the company with debt and then make special payments to themselves, watch out. My gut tells me that the activists will be looking out for themselves. Returns for everyone else may be somewhere over the rainbow.
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