Every investment decision you make, even holding cash, requires making trade-offs. That’s an important fact to keep in mind when looking at a company like Kraft Heinz (NASDAQ: KHC). There are a number of factors that suggest it is a buy. There are also a number of factors that suggest you should avoid it. However, if you have a very long investment timeframe, it could set you up for a lifetime of income. Here’s what you need to know to decide whether Kraft Heinz is right for you.
From a big-picture perspective, Kraft Heinz is a consumer staples maker with a food focus. This is an attractive backdrop, given that everybody needs to eat. Essentially, it sells products that are relatively inexpensive, get purchased regularly, and often elicit brand loyalty. Although no company can completely avoid the effect of recessions, consumer staples stocks tend to perform well throughout the economic cycle.
Kraft Heinz owns some truly iconic brands, too, including its two namesakes and the likes of Velveeta, Oscar Mayer, and Lunchables, among others. These are the types of brands that get customers into stores, and thus Kraft Heinz is an important partner for retailers around the world. Adding to that is the fact that the food maker has a strong distribution network, marketing team, and research and development division.
The core story here is very compelling, but then why is the dividend yield 5.3% when the average consumer staples company yields just 2.8%? This is where things start to get complicated.
Kraft Heinz was created via the merger of Kraft and Heinz. The goal of that merger was to increase profits by cutting costs. It didn’t go as well as planned, and there was a change in management. Now Kraft Heinz is trying to focus its efforts on a small number of higher-performing brands. This isn’t exactly working as well as hoped right now, either. For example, third-quarter 2024 organic sales for the brands management is focusing on fell 4.5%, while the other brands in its portfolio grew organic sales.
That’s the exact opposite of what investors were likely expecting to see. Given that the second attempt at a business turnaround isn’t going as smoothly as hoped, it would be understandable if investors wanted to avoid Kraft Heinz right now. However, the company is moving in a positive direction, notably with regard to its financial situation. Leverage is down materially since peaking in 2020. This suggests that Kraft Heinz has the wherewithal to work through the current period and put its business back on a better path.
What’s notable is that the approach management is attempting to take is basically the same one that has worked well for peers like Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL). Given enough time, there’s no reason to believe that Kraft Heinz can’t figure out how to best position itself for the future. Thus, if you have a long time horizon, the stock might be interesting. You just have to go in knowing that dividend increases are unlikely until the company is back in growth mode. Of course, the stock will probably remain moribund until growth returns, as well.
If you are looking at high-yield Kraft Heinz today, you have to consider the trade-offs before buying it. If you prefer to own companies that are executing well, it won’t be for you. The company is struggling to get back on track and will be “dead money” until it actually does start to turn things around.
If you don’t mind collecting that lofty yield while you wait for management to figure things out, it could be attractive. After all, Kraft Heinz has a large and important portfolio of brands to offer. You just have to go in knowing that it could take a little while before you start to see more positive results. Assuming it does, eventually, get back on track, buying now could end up setting you up with a lifetime of income.
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Reuben Gregg Brewer has positions in Procter & Gamble and Unilever. The Motley Fool recommends Kraft Heinz and Unilever. The Motley Fool has a disclosure policy.
Could Buying Kraft Heinz Stock Today Set You Up for Life? was originally published by The Motley Fool
