Shares of packaged-food giant Kraft Heinz (KHC -0.55%) have gone almost nowhere in the past four years. What's more, the stock is well below its all-time high. Trading around $36 per share, Kraft Heinz is down about 63% since peaking back in early 2017.
One benefit of this beaten-down stock price for investors thinking about buying shares of Kraft Heinz is a high dividend yield. Based on the most recent quarterly dividend payment of $0.40 per share, Kraft Heinz stock currently yields about 4.5%. That's nearly triple the dividend yield of the S&P 500.
Before you jump aboard the Kraft Heinz train for that sky-high dividend yield, there are a few things to consider.
The good: Iconic brands and inflation-busting results
Kraft Heinz is behind some of the best-known brands in the packaged food industry. These include the namesake Kraft and Heinz brands, as well as Oscar Mayer, Philadelphia, Kool-Aid, Jell-O, Maxwell House, Grey Poupon, and a host of others.
In an inflationary environment, strong brands are valuable assets. While some consumers are always going to trade down when money gets tight, many will stick with their preferred brands and accept higher prices to a degree. A price increase for Heinz ketchup, for example, would probably need to be quite large to push a meaningful number of consumers to a cheaper brand.
While there's a limit to Kraft Heinz's pricing power, the company has successfully passed off higher costs to consumers while taking a minimal hit to volumes. In the first quarter of 2023, which ended April 1, organic revenue grew by 9.4% year over year. This was driven by a 14.7-percentage-point contribution from higher prices, which was offset by a negative-5.3-percentage-point contribution from volume and mix.
Higher prices are leading to lower volumes, but enough customers are sticking with Kraft Heinz's brands to push up revenue and profit considerably. The company's net income rose 7.1% year over year in the first quarter, benefiting from higher revenue and the impact of cost efficiencies. It's clear from these results that Kraft Heinz has meaningful pricing power.
For the full year, Kraft Heinz sees organic revenue growing by 4% to 6%, even with high-single-digit inflation expected. Adjusted earnings per share should come in between $2.83 and $2.91, which puts the price-to-earnings ratio at 12.5. Given the strength of the company's brands, this seems like a pessimistic valuation.
The bad: A dividend that's stuck
While Kraft Heinz's portfolio of solid brands is helping the company manage through a tough environment, the dividend is less attractive than it appears. The high yield is enticing, but investors have been burned before.
Kraft Heinz slashed its quarterly dividend by 36% in early 2019 in an effort to strengthen the balance sheet. Unsurprisingly, the stock tumbled. Shares were already trending lower at the time, but the dividend cut exacerbated the situation. Since that dividend cut, Kraft Heinz has held the quarterly dividend steady. In other words, there's been no dividend growth at all.
Given the company's earnings guidance, investors shouldn't expect a meaningful dividend increase anytime soon. The dividend will eat up about 55% of adjusted earnings this year, based on the midpoint of the company's guidance. That's high enough that anything other than a token increase is unlikely.
The growth potential of the dividend looks worse when you consider free cash flow, although free cash flow can make big swings from year to year for a variety of reasons. Kraft Heinz generated free cash flow of $1.55 billion in 2022, while the dividend cost the company $1.96 billion.
The bottom line: Kraft Heinz is not a dividend growth stock, at least for now.
Is Kraft Heinz stock a buy?
Kraft Heinz stock looks attractive relative to adjusted earnings, and the dividend yield is high. The company's recent results are also encouraging, with a clear demonstration of pricing power. However, that high dividend yield is the result of a slumping stock price, not dividend growth.
Kraft Heinz's balance sheet is also still far from pristine. Cash and cash equivalents fell to just $826 million at the end of the first quarter, while total debt stood at $20.1 billion. Interest payments cost the company more than $900 million annually. In 2022, interest ate up one-quarter of operating profit.
Taken altogether, it's clear that Kraft Heinz stock is a mixed bag. For long-term investors looking for a value stock with a high dividend yield, and who understand that the dividend probably isn't going to grow much in the foreseeable future, Kraft Heinz is an attractive option. The company's brands and pricing power should help carry it through a recession.
But a debt-ridden balance sheet makes the company fragile, and its pricing power could erode if economic conditions worsen significantly. While Kraft Heinz is a reasonable stock to buy and hold, I'll take a pass on this packaged-food giant.
