Every company eventually goes through a difficult period; that’s just how the business world works. Meanwhile, the tough times could provide good buying opportunities for long-term investors. However, you need to be careful so that you don’t end up buying a company that looks like it could go the way of the buggy whip. A comparison between Altria(NYSE:MO) And Kraft Heinz(NASDAQ: KHC) will help explain the tightrope that turnaround investors must walk.
Altria is one of the largest tobacco companies in the world. It mainly sells cigarettes and focuses on the US market (it has spun off its foreign operations into Philip Morris International(NYSE:PM) several years ago). Given the addictive nature of tobacco, Altria’s customers are generally very loyal. And it owns the Marlboro brand, which has a huge market share of about 42% in the United States. Overall, Altria’s market share is almost 46%. It is a giant in the cigarette industry.
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Kraft Heinz is one of the largest packaged food companies in the world. It was created from the merger of Kraft and Heinz, two of the most legendary names in the food industry. While it doesn’t have a single dominant brand like Altria, you’re probably familiar with many of the company’s products, including the obvious ones like Kraft and Heinz, as well as Philadelphia Cream Cheese, Lunchables, Kool-Aid and Jell-O. many others. The company’s collection of brands, distribution system and marketing capabilities make it a valuable partner for retailers around the world.
While both Altria and Kraft Heinz are facing business headwinds, the issue facing Altria is particularly concerning. Demand for cigarettes has been declining in the United States for years due to a societal shift away from smoking as the habit has been clearly identified as a health hazard. To give some figures: Altria sold 10.6% fewer cigarettes in the first nine months of 2024 than in the same period of 2023. In 2023 it sold 9.9% fewer cigarettes than in 2022. The downward trend continues. for years.
Altria has managed to raise prices to offset continued declines, helping it support its massive 7% dividend yield. This fact has kept investors interested in the stock, but it simply obscures the big problem: Altria’s primary business (tobacco products, which account for almost 90% of sales) seems to be in gradual decline.
The problem Kraft Heinz faces is a little different. The two companies merged with the idea of generating value by cutting costs. That did not work out as well as hoped, because it is very difficult for a company to find its way to growth. The company is now working on another plan, which includes removing laggard products and placing more emphasis on key products. This is the same approach that has been used successfully in recent years by a number of other consumer goods companies, including Procter & Gamble(NYSE:PG).
That’s no guarantee that it will work for Kraft Heinz, as the company has posted weak results in the areas where it has supposedly focused its efforts. However, that weak execution is why the dividend yield today is 5%, compared to about 2.6% for the average consumer staples company. Given the company’s brands, size and distribution system, it seems like it will likely muddle through the transition it’s working on, even if it’s a bumpy ride.
Here’s the question: Is around 2 percentage points of return worth the risk of owning a company facing a long-term decline in its core industry? That would be exactly the decision you would make if you were buying Altria over Kraft Heinz. Buying Kraft Heinz would mean buying a diversified food company that is working to transform a range of iconic brands with the same approach that has worked successfully for other consumer goods companies. And since the return is a whopping 5%, it’s not like you won’t get paid well if you wait for Kraft Heinz to work through this business transition.
But remember that there is one important difference: food is not in gradual decline. The demand for food is likely to grow along with the world’s population. Kraft Heinz’s business is thus on a fundamentally stronger foundation than Altria’s. From a risk/reward perspective, Kraft Heinz’s lower yield seems like the better choice for most investors.
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Reuben Gregg Brewer holds positions at Procter & Gamble. The Motley Fool recommends Kraft Heinz and Philip Morris International. The Motley Fool has a disclosure policy.
Best stock to buy now: Altria vs. Kraft Heinz was originally published by The Motley Fool
