Dividends can be a great way to book a return on your investment portfolio no matter what stock prices are doing. But with the S&P 500(SNPINDEX: ^GSPC) yielding just 1.3%, many stocks simply don't yield enough to be viable sources of passive income or supplement income in retirement.
Packaged food giant Kraft Heinz(NASDAQ: KHC) yields about 5.3%, which is more than investors can get from most high-yield savings accounts or a 10-year Treasury bond. But unlike Treasury bonds, which are backed by the U.S. government, a dividend is only as good as the company paying it.
Here's a look at whether Kraft can support its payout and if this high-yield dividend stock is worth buying now.
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Mediocre results and guidance
The main issue with Kraft is that the business is barely growing. In 2024, net sales declined by 3% year over year. Adjusted operating income rose 1.2%, and adjusted earnings per share (EPS) was up just 2.7%. Free cash flow (FCF) was the standout: up 6.6% year over year. Kraft Heinz used its $3.2 billion in FCF to pay $1.9 billion in dividends and repurchase $988 million worth of its shares.
This year's guidance calls for organic sales to be flat or down 2.5%, adjusted EPS to fall 12.3% at the midpoint, and flat FCF. Although the guidance isn't great, Kraft remains a stable cash cow that is generating plenty of FCF to easily support its dividend.
A stable payout
Any time a stock has a higher-than-historical yield, it's usually because the share price hasn't done well, so the dividend yield goes up. Some companies will routinely raise their dividends year after year, but the yield will fall over time because the stock price is outpacing the dividend growth.
In 2019, Kraft slashed its quarterly payout from $0.625 per share to $0.40 per share and has kept it the same ever since -- for 25 quarters in a row. Given the poor performance of the business in that period, it makes sense that Kraft hasn't raised the dividend. But with the yield up to 5.3%, investors may be wondering if another dividend cut is in the cards.
As mentioned, Kraft was able to support its capital return program (dividends and buybacks) with FCF last year. This year, it is guiding for flat FCF. And since the dividend has also been flat, Kraft should make plenty of FCF to cover the payout.
The following chart shows how the stock price is down significantly from before the dividend cut. However, the cut was arguably the right decision because it made the payout more affordable for the company.
As you can see in the chart, Kraft has consistently generated plenty of FCF to cover the payout since the dividend cut. Another good sign that the company's fundamentals are improving is its balance sheet. Its total net long-term debt has come down, as have leverage ratios like financial debt-to-equity and debt-to-capital.
Kraft has investment-grade credit ratings from all the major agencies -- BBB from S&P Global and Fitch Ratings and Baa2 from Moody's. Although it is on the low end of the investment-grade scale, the credit ratings do reflect the company's efforts to shore up its balance sheet.
Kraft's dividend is safe
Kraft's strong FCF and balance sheet provide a margin of safety to support its dividend, even if tariffs elevate costs and squeeze margins. Or if consumer demand remains under pressure.
When choosing quality dividend stocks to buy and hold, it's best to go with companies that don't need everything to go right to fulfill their promises to investors.
The longer-term problem for Kraft is navigating changes in consumer preferences. The economic cycle has nothing to do with a slowdown in the company's growth over the last few years or the stock's underperformance relative to the market. Investors will want to see Kraft adjust its product lineup so that it doesn't lose market share to competitors.
For example, Kraft could take a page out of PepsiCo's book. Pepsi, which owns Frito-Lay and Quaker Foods, has been acquiring brands that play more to healthy snacks and ready-to-eat mini meals. These acquisitions diversify PepsiCo's revenue stream and allow it to tap into a new pool of buyers.
Kraft's dividend is in good shape, but the company's growth could languish in the near term. In the meantime, the stock is super cheap at a price-to-earnings ratio of just 13.4 and an even lower price-to-FCF of 12.2.
Add it all up, and Kraft Heinz looks like a solid value stock with a high yield for risk-averse investors to buy now if they're looking to boost their passive income.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Moody's and S&P Global. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
