Kraft Heinz (NASDAQ: KHC) is the amalgam of two iconic names in the food space. It owns some of the best-known brands you’ll find in grocery stores, but it has been struggling to execute. While the company appears to be on a better path today than it was not too long ago, investors should probably pay extra close attention to its three pillars of growth, because some aren’t holding up as well as you might hope.
A little Kraft Heinz history to set the stage
One of the biggest investors in Kraft Heinz is Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). That might make some investors take notice, but it hasn’t worked out nearly as well as Buffett has hoped. The original plan for the food maker was for the company to cut costs as a way to boost profitability. That may have been attractive for a little while, but it didn’t work out over the longer term.
Kraft Heinz hasn’t really delivered on the promise of improved results. Since the tie-up, key financial metrics like gross profit margin, revenue, and earnings have barely changed. The company also ended up cutting its dividend, which is not a sign of strength. One of the big reasons for the dividend cut was the need to reduce leverage, which management has been doing successfully.
While strengthening the balance sheet is a good outcome, it isn’t the same as operating a strong business. Investors generally want to see both.
Kraft Heinz is shifting its business
Kraft Heinz has changed direction, going from cutting costs to investing in the business for growth. That’s a good sign, with management looking to exit less desirable product lines so it can focus on its most important offerings. To that end, it currently breaks its brand portfolio into three buckets: accelerate, protect, and balance. The key takeaway is that there are growth brands and everything else, including some brands that the company might like to get rid of.
The first quarter of 2024 shows that the accelerate brands are doing exactly what Kraft Heinz wants, with organic growth of 2%. But the rest of the business — well, things aren’t looking so good. The protect category was actually the worst performer, with organic sales down 5%. The balance group saw organic sales drop 4%.
The glass-half-full story is that Kraft Heinz is achieving success in the areas where it is focusing (accelerate brands). The glass-half-empty story is that the rest of the business appears to be suffering as protect and balance brands get less attention. That’s not a recipe for long-term success.
That said, Kraft Heinz has a 4.4% dividend yield, which is notably above the 2.8% or so average for the consumer staples space. More aggressive investors might decide that the risk/reward balance here is tilted in their favor. But there is clearly additional work to be done. The company is rumored to be shopping one of the most iconic brands (Oscar Myer) within its balance segment. So things are getting better, but Kraft Heinz is still a work in progress.
Don’t ignore Kraft Heinz but tread with caution
At the end of the day, Kraft Heinz probably won’t be the best option for risk-averse investors even though it offers a relatively attractive dividend yield in the consumer staples space. However, more aggressive investors might want to dig in, because progress is being made. The problem is that the progress is only being achieved in the areas where management is paying the most attention. The rest of the business, all of which could possibly end up on the chopping block at some point, seems to be lagging. But if you have a long enough time frame, and can stomach some potentially unsettling uncertainty along the way, Kraft Heinz could end up being an attractive dividend stock. Just make sure you understand what you are getting into before you hit the buy button.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
High-Yield Kraft Heinz Stock Isn’t Delivering Right Now. What Investors Need to Know was originally published by The Motley Fool
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