Kraft Heinz (KHC -0.55%) spent some time struggling after the merger of Kraft and Heinz that created it. But the food maker is in much better shape today after a portfolio repositioning and efforts to strengthen the balance sheet, and today the stock offers an attractive 4.5% dividend yield and a renewed focus on growth. Is it worth buying? Here's some things to consider.
Kraft Heinz, the business
Kraft Heinz is a large consumer staples company with a global presence. It owns brands including the namesake Kraft and Heinz monikers, as well as icons Oscar Mayer, Velveeta, Jell-O, and Lunchables, among many others. These brands are staples in grocery stores.
Image source: Getty Images.
With a market capitalization of more than $40 billion, it competes with some of the largest food makers in the world. The company's scale is important, because it is a valuable partner to retailers. Notably, Kraft Heinz's scale gives it the ability to advertise and introduce new and improved products helps to bring customers into grocery stores.
A long-running problem for Kraft Heinz, however, has been regaining its footing following the merger of Kraft and Heinz. At first the combined company was focused on cutting costs to boost profits. But that path can only go so far before growth has to be driven in a different manner, and Kraft Heinz ended up stumbling as it tried to shift gears.
Today, however, Kraft Heinz appears to be on a stronger footing. Notably, leverage is back to manageable levels, with the company's debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of around 3.6 back in line with its peers. Leverage is right in line with management's target as well, which allows the company to shift from defense to offense. At this point it has broken its portfolio into three groups: balance, protect, and accelerate. There are nuances here, but the basic way to look at that is that the company has brands that are expected to maintain market share and produce solid cash flow, slow-growth brands, and brands with strong growth prospects.
KHC Financial Debt to EBITDA (TTM) data by YCharts
All in all, Kraft Heinz looks better positioned to compete today than it has in a long time.
The argument to buy Kraft Heinz
With the company's leverage back in line with peers, more conservative income investors should probably find the 4.5% dividend yield appealing. The payout ratio is nearly 70%, which may sound a bit high, but is actually not out of line with the company's long-term trends. While the dividend has been static at $0.40 per share per quarter since it was cut in 2020, it seems like there's actually a path for long-term business growth that might lead to dividend growth in the future, with the company's accelerate brands now accounting for nearly two-thirds of revenue.
The current expectation is for organic sales growth of around 2% to 3% a year over the long term, with adjusted earnings expanding at a rate of 6% to 8%. These are fairly strong numbers in the consumer staples space. That said, you have to believe that management can actually hit those targets on a regular basis after a long period of adjustment. You'll be paid well to wait for management to prove itself, however -- the average consumer staples stock has a yield of just 2.5%, using Consumer Staples Select Sector SPDR (NYSEMKT: XLP) as a proxy. Income-oriented investors may finally like what they see here.
The argument to hold Kraft Heinz
If you have been holding on to Kraft Heinz in the hope that the company would finally get back on the growth path, well, now is probably not the time to sell it. It does appear better positioned now than it has been in a long time. Notably, despite a 1.8 percentage point headwind from an extra week in 2022, Kraft Heinz was able to grow sales 0.6% in 2023. Organic sales grew 3.4% in the year. That's a solid outcome. Price increases were a big part of the story, but price increases have been a key factor in growth for most consumer staples makers lately, given the swift rise in inflation.
Although volume declines in the face of rising prices suggests that there is more work to be done, Kraft Heinz appears to be operating with a solid base. For example, adjusted gross profit margins improved a solid 2.4 percentage points in 2023 and adjusted earnings per share rose 7.2%, including a negative 2.4 percentage point impact from the extra week in 2022. It likely pays to stick around and see how things develop from here.
The argument to sell Kraft Heinz
The reason to sell Kraft Heinz is simple: You don't believe it can compete effectively with its food maker peers. It owns iconic brands, but execution has been a trouble spot in recent years. Despite the company being seemingly on the verge of a performance upturn, you may decide that there are better positioned companies in the consumer staples sector. Indeed, Kraft Heinz's turnaround story may simply not be for you, and that's OK.
Kraft Heinz seems poised for a brighter future
All in all, it appears that Kraft Heinz has successfully repositioned its business. Although it will never be a high-growth stock, it seems likely that slow and steady growth could be on tap from here. Add in a 4.5% dividend yield and there's a good reason for dividend investors to take a close look, and for long-standing shareholders to stick around. That said, Kraft Heinz has tried to get back on the growth track before, so some investors might want to just move on to greener pastures.
If you do buy it or continue to hold it, watch the top and bottom lines closely. If management can't live up to its own goals you may want to change your mind and sell. However, if the goals are met, Wall Street will likely change its mind and place a higher valuation on the stock. A return to dividend growth would be a huge positive sign.
