Warren Buffett's stewardship of Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) has been a legendary success, and there's little wonder why investors pay close attention to moves made by the Oracle of Omaha. As pointed out in an article by CNBC in September, Buffett's company has managed an average annualized return of 17.1% since 1985 -- delivering fantastic performance for stakeholders and crushing the overall market's 10.5% total annualized return across that time frame. But it hasn't been all sunshine and roses for the famous investor.

Berkshire's performance has recently been lagging the S&P 500 index. Part of that is down to the massive size of the investment firm and its scale naturally pushing the company to invest in larger businesses that are both capable of moving the needle and less inclined to deliver explosive growth. Buffett and Berkshire have also backed some notable losers and laggards, and perhaps no underperforming investment from Buffett has received more attention than the stake in Kraft Heinz (NASDAQ:KHC).

Warren Buffett.

Image source: The Motley Fool.

Kraft Heinz has lost nearly 40% of its value over the last year and more than 60% over the last three years, but Berkshire is still in profitable territory on its position. So, just how much has Buffett made on the investment in the food company? And how much better off would Berkshire have been if it simply put its Kraft Heinz money into an S&P 500 index fund?

Berkshire's Kraft Heinz stake is a profitable blunder

Berkshire's ownership of 325 million shares in Kraft Heinz has held constant since 2015, giving it a 26.8% ownership stake in the food company. The value of the company's Kraft Heinz shares, based on their current price of roughly $31, comes out to about $10.1 billion -- or about $300 million above the $9.8 billion purchase price. It's important to clarify that Buffett has yet to realize any capital gains on the stock by selling shares, but Berkshire has banked significant dividend payments from the holding.

Each of Berkshire's Kraft Heinz shares has generated $10.60 in dividend payments across the period of the company's ownership, working out to lifetime dividend payments of $3.445 billion. Adding the capital appreciation plus the dividends paid across the stretch brings us to a total figure of about $13.8 billion. That works out to a profit of roughly $3.65 billion, good for a 37% return.

That might not look too bad, but as Warren Buffett well knows, performance is graded in relative terms. The S&P 500 index produced a total return of roughly 63% since Kraft and Heinz started trading as a combined company on July 6, 2015. And while Berkshire's stake in the company is still billions of dollars in the black, it's not surprising that many investors are fixated on how that capital could have been put to better use.

Weakening brands

Kraft Heinz closed at nearly $73 per share after its first day on the market as a combined company. The company's shares are down about 28% year to date, and the stock is off roughly 57.5% since the merger that Berkshire and 3G Capital orchestrated between Kraft and Heinz closed. 

SPY Total Return Price Chart

SPY Total Return Price data by YCharts.

Big dividends helped boost the company's total return across the stretch, but slashing its quarterly payout from $0.625 per share to $0.40 in February caused some shareholders to exit their positions. And an uninspiring business outlook suggests that concerns about further payout cuts may be warranted.

The issue at hand is that Kraft Heinz's product portfolio looks much weaker than it did just a few years ago. The company took a $15.4 billion write-down in February on its Kraft and Oscar Mayer brands, and this was followed by another $1.2 billion impairment charge in August. Building new brands that follow the consumer shift toward healthier offerings could be capital intensive and come with risks that some shareholders won't be comfortable with. Operational cost-cutting initiatives and price increases for some brands will improve bottom-line performance in the short term, but they may not do anything to address fundamental structural issues at the company. 

Berkshire may be stuck in Kraft Heinz -- for now

The massive size of Berkshire's stake in the food company means that the investment house probably couldn't move out of its position without triggering a wave of sell-offs, at least not quickly. Even if Buffett and his team were to slowly exit the position, it's a move that would attract a lot of investor and analyst attention with Berkshire's subsequent 13F filing.

Kraft Heinz shares fell 4% in the day of trading that followed 3G Capital's September disclosure that it had reduced its holdings in the company by roughly 9% -- down to 245 million shares. 3G sold 25 million shares at a price of $28.44. News that Berkshire recently sold a small portion of its Apple position put observable pressure on the tech stock, and the iPhone company looks much healthier than Kraft. It's reasonable to expect that Buffett selling out of Kraft Heinz would have a significant impact on the company's valuation.

Berkshire is still up substantially on its investment in Kraft Heinz, but it's undeniable that the money that it put into the company could have been put to better use, and it's not hard to see why the deal has attracted so much scrutiny. Buffett has stated that he still believes in Kraft Heinz, but given that merger partner 3G Capital significantly reduced its stake at a price well below current market value, it wouldn't be shocking if Buffett took the right opportunity to cut his company's Kraft Heinz position.