The Kraft Heinz Company, well-known worldwide for its successful brands, may offer investors a great dividend option.
The Kraft Heinz Company was formed in 2015 through a merger between Kraft Foods and Heinz, and Warren Buffett got involved in the merger in 2013, owning a 26.65% stake and over 325 million shares in the company. Minority holders include Vanguard (4.49%), SSgA Funds Management (2.5%), and BlackRock Fund Advisors (2.22%).
The company has been through some bumps in the road, but with its strong brands, is it worth the investment for its dividend potential? Let's dig in.
About the Kraft Heinz Company
The Kraft Heinz Company, which is headquartered in Pittsburgh, Pennsylvania, manufactures and markets food and beverage products in the U.S. and throughout the world. It produces a wide variety of products, including:
- Cheese and dairy products
- Spices and seasonings
Its brands include Oscar Mayer, Kraft, Heinz, Ore-Ida, Classico, Velveeta, Smart Ones, Capri Sun, Kool-Aid, Jell-O, Philadelphia, Lunchables, Maxwell House, Grey Poupon and others.
The company's storied legacy began when entrepreneur Henry John Heinz kickstarted a small food business in 1876. Heinz Tomato Ketchup was one of the very first products the company developed and remains Heinz’s most iconic brand, dominating the most market share for ketchup in the U.S. The company was incorporated in 1905 and Heinz grew 20 processing plants throughout the country.
On the other hand, Kraft began when James L. Kraft began a wholesale door-to-door cheese business in Chicago which was incorporated in 1909. Five years later, the J.L. Kraft and Bros. Company sold 31 types of cheeses. Later, the company created a pasteurized processed cheese in order for consumers to be able to "keep" cheese in their kitchens for a longer period of time.
The company distributes products through its own channels as well as through independent brokers, agents and chains, wholesale, cooperative and independent grocery accounts, as well as through a wide variety of other distributors. It also sells its products online through various e-commerce platforms and retailers.
The Kraft Heinz Company expects continued strong performance in 2022, expecting adjusted EBITDA to range between $5.8 billion to $6 billion. The company's net sales decreased 0.9% compared to a year ago. Organic net sales also increased 10.1% compared to a year ago.
Net income/(loss) increased over 1,000% versus a year ago due to debt extinguishment costs. Adjusted EBITDA decreased 10.9% to $1.5 billion from the year prior. Diluted EPS was $0.21, up 1,150%. Adjusted EPS was $0.70, down 10.3%.
Year-to-date net cash provided by operating activities was $788 million, down 61.2%. Year-to date free cash flow was $353 million, down 78% from the prior period.
Pros and Cons of Investing in Kraft Heinz
Before you invest, it's worth taking a look at the benefits and drawbacks of investing in Kraft Heinz.
The benefits of investing in Kraft Heinz include the following:
- Brand loyalty: Kraft Heinz customers have considerable brand loyalty, believing that they offer better service and higher quality than other companies, regardless of the pricing of its products. Consumers may also be more apt to try out other products that Kraft Heinz also offers.
- Dividends: Those who invest in Kraft Heinz can't ignore the promise of dividends. The most current quarterly dividend will be paid on Friday, September 23. Investors on record as of Friday, August 26 will be issued a dividend of $0.40 per share, with an ex-dividend date slated for August 25. The company has an $1.60 annualized dividend and a yield of 4.13% with a payout ratio of 131.15%.
- Optimized brand portfolio: Kraft Heinz has revitalized its classic brands and got rid of its weaker brands, including Cheez Whiz overseas. At the same time, it has adopted growing brands for its portfolio, including Brazilian condiment maker Hemmer and German-based Just Spices.
The downsides of investing in Kraft Heinz include the following:
- Downed sales and debt: Kraft Heinz has seen stagnant growth beyond the growth in 2020 to 2021 due to excessive COVID-19 consumer buy-ups and price hikes. In addition to that, the company has been lugging around extensive debt after its merger.
- Healthier food trends: One of the downsides of Kraft Heinz's products is the fact that the world as a whole has made a larger shift toward healthier food trends. These changes will likely continue to have to challenge the company to change its messaging and marketing over the near term and into the future.
- Mounting consumer prices: It's no secret that consumer prices have continued to rise. This means that Kraft Heinz will have to continue to mitigate the requirements of raising the costs of its products, supply-chain challenges and keeping consumers wanting to continue purchasing the company's brands. As prices increase, the company could always suffer the chance that customers will switch to lower-cost brands.
Look into Kraft Heinz for the Right Reasons
So, should you invest in Kraft Heinz? That depends on your goals and investment objectives. Due to its focus on consumer staples, it shows potential in that it provides items that every consumer needs. In other words, due to its inherent nature, you may consider Kraft Heinz to be a worthwhile investment because of its brand name recognition and successful product distribution worldwide.
Kraft Heinz paid out 129% of profit in the past year, which can be a sign of an unsustainable dividend, though it's important to note that it paid out free cash flow within range that is well within normal limits — 61% — in the past year.
However, Kraft Heinz's substantial debt and product sales struggles (not accounting for pandemic-era increases) may drive you away from the stock. The company may still straighten out its balance sheet in the future but in the meantime, it's worth considering whether investing in the company makes sense for your needs in the interim, though a buy-and-hold investment could pay off over the long term.
Companies Mentioned in This Article:
|Company||Current Price||Price Change||Dividend Yield||P/E Ratio||Consensus Rating||Consensus Price Target|
|Kraft Heinz (KHC)||$38.18||+2.0%||4.19%||19.99||Hold||$42.67|