Got some dry powder sitting on the sidelines that you'd rather not put into higher-risk assets because you're worried about another broad-market downturn? That's understandable. In these circumstances, you might even be tempted to put that money into Treasury bonds and settle for a risk-free return of 4% or 5% per year.
Yet you might have a nagging feeling that you can do better than T-bills. That's probably true. One possibility is Kraft Heinz (KHC -0.55%), which has rewarded investors with returns that aren't exactly risk free, but have historically held up well during times of economic turbulence. So, let's see if there's a solid case in favor of a consumer staples stand-by that's favored by a certain investing luminary from Omaha.
Low beta, big dividends
If you're going to put your hard-earned capital on the chopping block, you might as well put it into an asset that will let you sleep soundly at night. Kraft Heinz stock fits the bill as it has a low five-year monthly beta of 0.69, which means that historically the stock has moved up and down significantly less vigorously than the S&P 500 (which has a benchmark beta of 1).
Kraft Heinz stock's low-volatility profile was put to the test at the start of the COVID-19 pandemic. During March and April 2020, the stock fell from the mid-$20s to the low $20s -- painful, yes, but not nearly as gut-wrenching as what happened to a number of comparatively high-beta tech stocks during that tumultuous market rout.
Meanwhile, some of those tech stocks pay no dividends whatsoever but consumer staples stalwart Kraft Heinz distributes a payout that, at current share prices, yields 4.2% annually. This compares favorably to the consumer defensive sector average dividend yield of 2.1%. On the other hand, Kraft Heinz's 56% payout ratio may be slightly above a level that's comfortable; I start to get worried when a company's dividend payout ratio exceeds 50% of the company's earnings, as the dividends may be unsustainable beyond that level.
Kraft Heinz stock offers appetizing value, albeit not perfection
Kraft Heinz's generous dividend distributions add some sugar and spice for long-term investors, and reinvesting those payouts can enhance your long-term returns. Yet, dividends and low beta aren't enough for discerning financial traders. After all, value is a top priority among many highly successful investors.
Speaking of value, it's hard to mention that concept without thinking of Berkshire Hathaway CEO Warren Buffett, the Oracle of Omaha himself. Kraft Heinz stock is a core holding of Buffett's portfolio; Berkshire's stake in the food manufacturer once exceeded 40%, but it declined to around 34.5% this year.
What would Buffett see in Kraft Heinz? Surely, he appreciates the decent dividend yield and low beta. Still, Buffett wouldn't likely risk billions of dollars on an unprofitable business that's too richly valued.
As it turns out, Kraft Heinz passes those tests with flying colors. The company has a stunningly consistent track record of not only posting profits, but beating analysts' EPS estimates quarter after quarter. Moreover, during Q1 2023, Kraft Heinz grew its organic net sales 9.4% and its earnings 13.3% year over year -- not too shabby during a time of elevated inflation.
Additionally, if you're looking for Buffett-approved value, Kraft Heinz hits all the right notes. Compared to the sector median, Kraft Heinz has a lower GAAP price-to-earnings ratio (19.3 for Kraft Heinz versus 22.5 sector median), price/earnings-to-growth (PEG) ratio (0.2 versus 0.67), and price-to-book (P/B) ratio (0.94 versus 2.59). So, while investors can't read Buffett's mind and know exactly why he likes Kraft Heinz, they can at least cite a handful of quick-and-dirty valuation gauges for reference.
There's no way to know exactly why Buffett reduced his position in Kraft Heinz stock, though the stock's underperformance compared to major indexes like the S&P 500 could be a source of frustration. Other less-than-ideal considerations may include Kraft Heinz's dividend cut as well as the company's 2019 $15.4 billion write-down of intangibles. Interestingly, Buffett actually admitted in 2019 that he "overpaid" for his stake in Kraft Heinz in 2015 -- though at that time, the merger between the Kraft and Heinz businesses was in progress and there were some adjustment disorder afoot as some top talent left the company. As we've seen in the aforementioned Q1 2023 results, Kraft Heinz is at least demonstrating some growth now, though investors should watch for follow-through in the upcoming quarters.
Now, at least you have a simple (but not quite perfect) idea to hopefully grow a long-term position through dividend reinvestment in Kraft Heinz stock. It just goes to show that being like Buffett isn't about portfolio size, but about picking a few reasonably valued assets and staying with them for the long haul -- and admitting mistakes when you make them.
