The first half of 2024 was not kind to Kraft Heinz (KHC 0.45%) and its shareholders. The stock fell just shy of 13% compared to a 14.5% gain for the S&P 500 index and an over 6% advance for the average consumer staples stock, using the Consumer Staples Select Sector SPDR ETF as a proxy.
What's going on, and is this laggard performance actually an opportunity to add a high-yield stock like Kraft Heinz to your income portfolio?
The big attraction with Kraft Heinz
Trailing the broader market and the consumer staples sector is not good news for Kraft Heinz. But contrarian investors looking for high-yield stocks will quickly notice that Kraft Heinz's yield is roughly 5%. That's far above the 1.3% or so yield of the S&P 500 and the 2.7% yield of the average consumer staples stock. The stock drop isn't a good sign, but that yield is looking pretty juicy. So what's been going on that investors are so downbeat on Kraft Heinz's shares?
Image source: Getty Images.
It's a long story that dates back to 2013 when Warren Buffett's Berkshire Hathaway teamed up with 3G Capital to take control of Heinz. The big plan was to improve earnings by trimming costs. That can work for a little while, but it isn't a great long-term plan. Eventually, management runs out of costs to cut. And when that happened, Kraft and Heinz agreed to merge, creating one of the largest food companies on Earth. It also provided 3G capital more costs to cut.
But a debt-laden balance sheet and a stagnant business left investors stale. Often when cost-cutting takes center stage vital pieces of a business can get neglected, like research and development in the food space. The power of the words "new" and "improved" for consumers can't be underestimated. If a company's competitors are running rings around it while it focuses on trying to limit spending, it won't be able to keep up and investors will eventually notice the long-term strategic problem.
Investors started to notice the issues that Kraft Heinz was facing in roughly 2017, as the graph above shows. Kraft Heinz saw the problem, too, and started to shift its model, including shaking up its top management. But reinvigorating a giant company that had been moving in the wrong direction for years is not an easy task. Investors have, basically, been in a show-me mood for a long time when it comes to Kraft Heinz.
Kraft Heinz is not quite there yet
Part of the company's new direction is to focus on its best brands. That's the same thing that other consumer staples companies have been doing, so it isn't out of step with the industry anymore. No company has only growth brands, though, so management is also trying to support core, slow-growth brands and looking to, perhaps, exit laggards that aren't resonating with consumers or don't have attractive margins. There's a wide divide between these groups at Kraft Heinz right now.
NASDAQ: KHC
Key Data Points
Specifically, in the first quarter of 2024, the company's targeted growth brands increased organic sales by 2%. That's an OK result and shows that management can achieve success when it puts its mind to it. But organic sales fell 5% within the group of brands that it labels as "protect" and 4% in the "balance" grouping, which is filled with laggard brands that might end up on the chopping block. Overall, organic sales declined 0.5%, which is not what investors want to see in a turnaround story. It says that Kraft Heinz still has more work to do, noting that the weakest segment was actually the one it was trying to "protect."
So the stock price decline in the first half of the year probably makes sense. But what about the success Kraft Heinz is achieving in its growth-oriented brands? This core group of brands makes up around two-thirds of sales, so it is the most important segment. The success here is being overshadowed by weakness elsewhere in the portfolio, but it shouldn't be ignored. And it has to be paired with the fact that the company has improved its financial position.
KHC Debt to Equity Ratio data by YCharts
All in, Kraft Heinz is operating off of a much stronger foundation today than it was not too long ago. And given the iconic brands in the food maker's portfolio, it seems reasonable that more aggressive investors with a longer time horizon might want to give management the benefit of the doubt again. While there are likely to be more bumps in the road, the company is making advances in important areas.
Buy Kraft Heinz with your eyes wide open
First off, conservative income investors probably won't want to own Kraft Heinz right now. There remains a great deal of uncertainty as it continues to overhaul its business. The problems it faces won't be resolved in months; they will probably require years to fix. But if you have a long-term perspective and don't mind buying out-of-favor companies, that 5% yield could be pretty tasty. In effect, you are getting paid well to wait for a company with important brands to get back on its feet. And the strength of Kraft Heinz's growth-oriented brands shows this industry giant still has some fight left.
