Kraft Heinz (Nasdaq: KHC) is an amalgamation of two iconic names in the food industry. It owns some of the most recognizable brands commonly found in grocery stores, but it's struggled with execution. The company seems to be on a better path now than it was a while ago, but investors should probably pay especially close attention to its three pillars of growth, because some aren't working as well as they'd hoped.
Let's take a look back at the history of Kraft Heinz.
One of Kraft Heinz's biggest investors is Warren Buffett. Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B)While some investors may have taken notice, it hasn't worked out as well as Buffett hoped: The food manufacturer's original plan was to cut costs to boost profitability, and while that may have been appealing for a while, it didn't work in the long term.
Kraft Heinz has not really delivered on its promises of improved performance. Key financial metrics such as gross margins, sales, and profits have remained largely unchanged since the deal. The company also cut its dividend, which is not a sign of strength. One of the big reasons for the dividend cut was the need to reduce leverage, and management has done a good job of doing that.
While a strong balance sheet is a good thing, it's not the same as strong business operations, and investors generally want both.
Kraft Heinz is shifting its business
Kraft Heinz has pivoted from cost cutting to investing in the business to grow. It's a good sign that management is moving away from less-popular product lines to focus on the most important products. To this end, the company is now dividing its brand portfolio into three groups: Accelerate, Protect, and Balance. The key point is that there are growth brands and everything else, including some brands the company wants to let go.
Q1 2024 shows that Accelerated Brands achieved 2% organic growth, exactly what Kraft Heinz hopes it would. But the rest of the business, well, things aren't much better. The Protected category was actually the worst performer, with organic sales down 5%. The Balanced Group's organic sales were down 4%.
The optimistic view is that Kraft Heinz is succeeding in the area they are focused on (accelerating the brand). The optimistic view is that they are focusing less on brand protection and balance and the rest of the business seems to be suffering. This is not a recipe for long-term success.
That said, Kraft Heinz's dividend yield of 4.4% is well above the consumer staples industry average of 2.8%. More aggressive investors may find the risk/reward balance in their favor. But there's clearly more work to be done. The company is rumored to be looking to acquire one of the most iconic brands in the balance segment (Oscar Mayer). Things are improving, but Kraft Heinz still has a ways to go.
Don't ignore Kraft Heinz, but act with caution
Ultimately, while Kraft Heinz offers a relatively attractive dividend yield in the consumer staples sector, it's probably not the best choice for risk-averse investors. More aggressive investors, however, might consider investing in the stock given the progress being made. The problem is that progress is only being achieved in the areas where management is paying the most attention. The rest of the business appears to be lagging behind, with the possibility of all being cut at some point. But if you have a long enough time frame and can stomach some potentially unsettling uncertainty along the way, Kraft Heinz could be an attractive dividend stock. Before you hit the buy button, you need to make sure you understand what you're investing in.
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Reuben Greg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
The post High-Yielding Kraft Heinz Stock is a Disappointment So Far: What Investors Need to Know originally appeared on The Motley Fool
