Kraft Heinz(NASDAQ: KHC) is a powerhouse consumer staple. Its owns several iconic brands that produce consistent cash flows and dividends for shareholders. But since the 2015 merger between Kraft Foods and H.J. Heinz, the stock is down 60% as of this writing, trailing the S&P 500's return of 155%.
Despite the underperformance, Warren Buffett's Berkshire Hathaway remains the company's largest shareholder. At the end of 2024, Berkshire Hathaway held 27.2% of the company's shares.
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Buffett is famous for his patience, and Kraft Heinz's consistent profitability makes it an attractive dividend stock with a yield over 5%. But after Buffett dumped a significant portion of Berkshire's larger stock holdings last year, investors have to wonder if Kraft Heinz is next on Buffett's sell list.
Is Kraft Heinz a deep value or a value trap?
Kraft Heinz's 2024 organic net sales (adjusted for things like foreign exchange and acquisitions and divestitures) fell 2.1% to $25.9 billion. The silver lining, however, is that management is keeping margins up, which led to a slight increase in adjusted earnings per share last year. The stock looks cheap trading at less than 10 times 2024 adjusted earnings of $3.06 per share.
The combination of a low price-to-earnings ratio and high dividend yield suggest the stock is undervalued. This might explain why Buffett continues to hold. But investors have to wonder if the value of Kraft Heinz's brands has eroded in recent years as it struggles to grow sales amid shifting consumer preferences and inflation.
There's one important reason Buffett may eventually sell Kraft Heinz. Berkshire Hathaway partnered with Brazilian private-equity firm 3G Capital to facilitate the merger. 3G Capital is famous for acquiring large consumer brands and aggressively cutting costs to make them more profitable. In his 2015 shareholder letter, Buffett said, "We share with them a passion to buy, build, and hold large businesses that satisfy basic needs and desires."
However, Kraft Heinz's financial results over the last 10 years certainly haven't lived up to expectations. Annual sales are down 2% since 2016. 3G Capital exited its stake in 2023 as the company continued to struggle to strengthen the top line amid rising inflation. It wouldn't be surprising to see Berkshire exit, too, if Kraft Heinz fails to turn around soon.
Why Buffett may hold
While there are good reasons to sell out of Kraft Heinz, Buffett may be extra patient with this one. Two of Kraft's board members have previous experience working at subsidiaries of Berkshire Hathaway. This board presence, along with Berkshire's large stake, ensures that it continues to have a strong influence on the business.
And this is still a company that owns top brands like Kraft cheese and Heinz ketchup, among many others. These brands help churn out lots of free cash flow every year. Its 2024 free cash flow increased 7% to $3.2 billion, which funded $1.9 billion in dividend payments and $1.0 billion in share repurchases.
In other words, Berkshire is earning $521 million in dividend income every year from its Kraft Heinz stake. That's a healthy incentive to exercise patience.
The biggest risk for Kraft Heinz is shifting consumer preferences to natural ingredients and healthy foods. There are ways industry stalwarts can tackle this challenge long term, namely by adjusting their ingredients and acquiring new brands. The added cost could be offset by improving supply chain efficiency.
Meanwhile, Kraft Heinz is seeing strong growth overseas with sales from emerging markets up 4% last year. Moreover, the company says that its $5 billion Heinz ketchup brand has grown sales over $600 million in the last two years. Management sees a $4 billion opportunity to grow sales further by increasing brand awareness.
There are better dividend stocks than Kraft Heinz
Berkshire Hathaway may be in a position where it makes sense to hold onto its Kraft Heinz stake and rake in those large dividend payments. But that doesn't mean you have to follow in Buffett's footsteps.
Management's guidance calls for adjusted sales to decline up to 2.5% in 2025, which could send Kraft Heinz stock to new lows. There are other dividend stocks in Berkshire's portfolio that are growing sales and paying a high yield, such as Coca-Cola, which offer stronger prospects for 2025 and beyond.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
