Billionaire Warren Buffett has always had a thing for companies that return capital to their shareholders. Passive income can create enormous amounts of wealth and make money productive while investors wait for a stock to rise in value.
Buffett’s company Berkshire Hathaway has several high-yield shares in its portfolio. However, of the 45 stocks and exchange-traded funds that Berkshire owns, only one has a dividend yield above 5% – and it’s a stock that Buffett has owned for more than a decade.
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Buffett and Berkshire first got involved Kraft Heinz (NASDAQ: KHC) in 2013, when Kraft Foods and Heinz were separate entities. Berkshire and a private equity firm called 3G Capital bought Heinz. The two teamed up two years later to merge Kraft and Heinz into the company it is today. The investment hasn’t exactly paid off: Kraft Heinz shares have been flat over the past five years, down about 33% overall.
In 2019, Buffett told CNBC that he had made a mistake. “I was wrong about Kraft Heinz in a number of ways,” he told Squawk Box. “We paid too much for Kraft.”
Yet today the Oracle of Omaha owns nearly 27% of the company, and it represents roughly 3.3% of Berkshire’s massive stock portfolio of more than $300 billion. Kraft Heinz also pays a healthy dividend yield of 5.18%.
Its dividend payout ratio, which looks at dividends paid as a percentage of profits, has reached almost 142%, meaning Kraft Heinz pays out more in dividends than it generates in profits. That’s not exactly something you want to see as an investor. However, the company suffered heavy impairment losses in the most recent quarter, which were much higher than normal, and these losses are not core to the business. Adjusted profits, which exclude impairment losses, actually rose about 4% year-on-year.
Kraft Heinz had free cash flow of more than $2 billion in the first nine months of the year, up 10% year over year. The company pays approximately $450 million in dividends per quarter. Kraft Heinz has paid a dividend every year since 2012, although it had to cut the dividend in 2019 and has not increased it since.
Given the level of free cash flow, Kraft Heinz’s dividend appears sustainable. Kraft Heinz hasn’t increased its dividend in several years, and it doesn’t seem like there’s much room to do so, although I’m sure income investors would be happy with a 5% increase as the company continues to work toward a turnaround.
