Kraft Heinz (NASDAQ: KHC) is the merger of two iconic names in the food world. It owns some of the best-known brands you’ll find in supermarkets, but it has struggled 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 the three pillars of growth, as some aren’t holding up as well as you’d hope.
A bit of 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). Some investors may notice that, but it hasn’t worked out nearly as well as Buffett had hoped. The food manufacturer’s original plan was for the company to reduce costs to increase profitability. That may have been attractive for a while, but it didn’t work in the longer term.
Kraft Heinz hasn’t really delivered on the promise of improved results. Since the collaboration, key financial metrics such as gross profit margin, revenue and profit have hardly changed. The company also eventually cut its dividend, which isn’t a sign of strength. One of the main reasons for the dividend cut was the need to reduce debt, something management has done successfully.
While strengthening the balance sheet is a good outcome, it is not the same as running a strong business. Investors generally want to see both.
Kraft Heinz is expanding its activities
Kraft Heinz has changed direction, from cutting costs to investing in the growth of the company. That’s a good sign, as management looks to exit less desirable product lines so it can focus on its core offerings. To this end, it currently divides its brand portfolio into three parts: accelerate, protect and balance. The key takeaway is that there are growth brands and everything else, including some brands that the company may want to get rid of.
The first quarter of 2024 shows that the acceleration brands are doing exactly what Kraft Heinz wants, with organic growth of 2%. But the rest of the case — well, it doesn’t look so good. The protection category actually performed the worst, with an organic sales decline of 5%. The balance sheet group saw organic turnover decline by 4%.
The glass-half-full story is that Kraft Heinz is achieving success in the areas it focuses on (accelerating brands). The glass-half-empty story is that the rest of the business seems to be suffering as brands that offer protection and balance receive less attention. That is not a recipe for long-term success.
That said, Kraft Heinz has a dividend yield of 4.4%, which is significantly above the average of around 2.8% for the consumer staples sector. More aggressive investors might decide that the balance between risk and reward here is in their favor. But there is clearly still work to be done. The company is rumored to be buying one of the most iconic brands (Oscar Myer) within its balance sheet segment. So things are getting better, but Kraft Heinz is still a work in progress.
Don’t ignore Kraft Heinz, but be careful
Ultimately, 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 sector. But more aggressive investors might want to dig in because progress is being made. The problem is that progress is only made in the areas where management pays the most attention. The rest of the company, all of which could end up on the chopping block at some point, appears to be being left behind. But if you have a long enough horizon and can stomach some potentially troubling uncertainty along the way, Kraft Heinz could end up being an attractive dividend stock. Make sure you understand what you’re 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 holds positions in and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
High-yield Kraft Heinz shares aren’t producing results right now. What Investors Need to Know was originally published by The Motley Fool
