One of the blogs that I frequent is called the Dividend Growth Investor. I found one of its recent posts, titled “A Case Study of My Investment in Kraft Foods” to be particularly intriguing. Of course, what I found most interesting about the post is how badly it misinterpreted the past and incorrectly forecasts the future.
So let’s dig into some of the ugly details.
The crux of the article is that the author invested in Kraft Foods (KFT) way back in April 2010 at just over $30 a share. The intervening years were good, with a grand total of $17.88 paid out in dividends (to early 2019). In addition, the original company split into two successor companies: Mondelez (MDLZ) and Kraft Heinz (KHC), which are worth about $58 after accounting for mergers and spinoffs.
The reason the author wrote the post was to prove that even a mediocre dividend growth investing play can still work out alright. In this case, Kraft Heinz cut its dividend in February 2019, prompting shares in the firm to collapse from $48 to around $34 a share.
No worries, though! Our intrepid dividend growth blogger simply sold his shares at the going market price in the wake of the dividend cut because Kraft Heinz no longer met his investment criteria. Even accounting for this unfortunate divestiture, he still claimed a robust 11.1% annualized return (without reinvesting dividends) over the nearly 9 year period – more than doubling his money.
This seems like a great return, all thanks to (in his words) “selecting quality companies at good valuations, being diversified, and maintaining proper risk management techniques.”
The only problem is that his dividend growth investment strategy is a lie. But like all good lies, it is clothed in half truths.
First off, he really did get an 11.1% per annum return from dividend growth investing. But the more important question is: how exactly? And can you and I replicate his success?
These are crucial details. He would like you to believe that his good fortune was the product of buying a “solid company” at a “reasonable valuation” and then holding for the “long term”. And if we were living in an economically normal environment, these justifications might be believable.
But these are not economically normal times. Instead, what we’ve experienced over the past decade has been nothing less than the largest securities market bubble in the history of the world. It is bigger than Japan’s twin real estate/stock market bubble in the 1980s, bigger than the Dutch Tulip Mania in the 1630s and bigger than the Wall Street Bubble of 1929.
Our current bubble exists on an almost incomprehensible scale. In fact, our modern-day “Everything Bubble” is so massive that it pervades every niche and corner of the real economy, making it almost impossible for the average person to spot. In other words, like a fish swimming through water, investors don’t realize they are lazily meandering through a vast bubble miasma.
What does this have to do with Kraft Foods and dividend growth investing?
It’s simple. Investors in Kraft and other dividend growth companies did well over the past decade not because they were stock picking geniuses or because the firms had solid fundamentals, but because the Federal Reserve (and other central banks) inflated history’s greatest securities market bubble.
Kraft Foods took advantage of the Fed’s cheap money policies to buy back billions of dollars worth of their own shares over the years. And they paid out generous dividends as well, amounting to billions of dollars more. But here’s the kicker: the company didn’t have the cash flow from operations to pay out these billions of dollars. Instead, the firm’s management financed these shareholder goodies by levering up their balance sheet!
What this means is that past shareholders (like our dividend growth investing blogger) benefited, while current and future shareholders will pay the price. Both of Kraft Foods’ successor companies – Mondelez and Kraft Heinz – have accumulated substantial debt loads from these past financial sins. Mondelez currently carries $19.4 billion in corporate debt while Kraft Heinz sports an eye-watering $31.3 billion debt load. Oh, and both companies also have negative tangible book values, meaning their factories, offices and other physical assets are worth far, far less than the sums they’ve borrowed.
This is all a fancy way of saying that the future prospects for Mondelez and Kraft Heinz are questionable at best. At worst, their high debt loads could ultimately endanger the future viability of both companies. I know I wouldn’t want to own them.
Regardless, our dividend growth investing blogger can claim a Pyrrhic victory of sorts. After all, he got out with a tidy profit despite Kraft’s pitfalls. But it is important to note that he only made money because he sold before the bubble burst! There are millions of current dividend growth investors who won’t get the message in time. These unfortunates have swallowed the myth of “investing in stocks for the long term” and will inevitably ride the collapsing Everything Bubble into financial ruin.
So if you were to sell, where should you put the proceeds?
Well I can certainly tell you were you shouldn’t reinvest your windfall. It is imperative you stay away from dividend growth companies. Indeed, it would be wise to avoid the stock market altogether. While there will always be a few niche industries that outperform regardless of the macro environment, I couldn’t begin to hazard a guess as to who will be the lucky winners. Unfortunately, most companies will simply collapse in value once the Everything Bubble pops.
In fact, this prediction is already coming to pass. Shares of Kraft Heinz have sagged from $34 to $28 in the last few months – an additional 17% loss on top of its earlier waterfall decline.
I like cash as an alternative to redeploying money into the markets at the moment. 4-week U.S. Treasury bills are currently paying around 2.35%, which I find to be a decent risk-free rate in a world where most investment returns will undoubtedly have a negative sign in front of them.
For those looking for a little more investment potential, I find that tangible assets offer great value. Gold, silver and platinum bullion are perennial favorites, with strong return profiles and almost no possibility of major capital impairment. Investment grade antiques such as vintage wristwatches, antique jewelry and rare coins are also great choices. They are tremendous bargains in the current environment, although you do have to exercise some caution due to their illiquidity.
In the final analysis, dividend growth investing is the cruelest lie of all – a seductive investment myth that has propagated because of the Federal Reserve’s Everything Bubble.
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