Adding a stock market pick from the Consumer sector can add stability to your portfolio. That’s because these companies sell items, like food, that consumers must buy regardless of the direction of the economy. The best consumer stocks have built brands that have strong customer loyalty and produce steady, predictable revenue streams.

In a just-published issue of Wall Street Stock Forecaster, our newsletter that focuses on U.S. stocks, we’ve updated our buy/sell/hold advice on a stock market pick that has a number of strong brands, Kraft Foods Inc. (symbol KFT on New York). Kraft is the world’s second-largest food company, after Switzerland-based Nestle.

This stock market pick cut its costs during the recession, including selling or discontinuing less-profitable brands, closing plants and cutting jobs. It has used these savings to improve the quality of its existing products and develop new ones.

As well, in April 2010, Kraft paid $18.5 billion in cash and stock for U.K.-based Cadbury plc, a leading maker of confectioneries, including chocolate, candy and gum.

Cadbury adds to Kraft’s stable of strong brands

Kraft has 11 brands that each generate over $1 billion in yearly sales. These include Kraft (cheeses, pasta and salad dressings), Philadelphia (cream cheese), Maxwell House (coffee), Nabisco (biscuits), Oreo (cookies) and Oscar Meyer (meats).

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Cadbury’s well-known brands include Dentyne and Clorets (gum), Dairy Milk (chocolate bars) and Halls (cough drops). The company’s products generate higher profit margins than Kraft’s other foods, so adding Cadbury should increase Kraft’s long-term earnings.

As well, Cadbury has a larger international presence than Kraft. So using Cadbury’s distribution networks will also help Kraft increase its sales in fast-growing countries, like China and India.

It will take Kraft three years to absorb Cadbury. But Kraft now believes that combining marketing, distribution and product-development functions will lower its annual costs by $750 million. That’s up from its original estimate of $675 million.

Cadbury should help Kraft lower its debt

To raise cash for the Cadbury purchase, Kraft sold its North American frozen-pizza business to Nestle for $3.7 billion. It also borrowed $9.4 billion. Kraft’s long-term debt of $29.6 billion is now a high 56% of its market cap. However, the extra cash flow from Cadbury should help Kraft pay down its debt.

Kraft could also put the $1.5-billion break-up fee it’s seeking from coffee-shop operator Starbucks Corp. (Nasdaq symbol SBUX) toward its debt. Starbucks wants to end a deal under which Kraft distributes Starbucks’ packaged coffee in grocery stores.

The $1.16-a-share dividend yields 3.8%. However, Kraft will probably wait until it pays down its extra debt before it raises the dividend.

Rising competition, ingredient costs could weigh on earnings

Like most big food companies, Kraft faces rising competition from private-label brands. As well, rising ingredient costs could squeeze its profit margins.

We’ll continue to monitor Kraft’s integration of Cadbury, and its plans for dealing with heightened competition, and update our buy/sell/hold advice accordingly in Wall Street Stock Forecaster. What’s more, you can get this issue absolutely free when you subscribe today. Click here to learn how.