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Robert Abbott
Robert Abbott
Articles (809)  | Author's Website |

Should You Buy this Buffett Stock for its Dividends?

Kraft Heinz offers a 5% dividend, but the payout ratio is over 100%

July 07, 2020 | About:

For some investors, buying small tranches of some of the stocks that Warren Buffett (Trades, Portfolio) buys for Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) serves as part of their investment strategy.

Berkshire Hathaway teamed up with 3G Capital Inc. in 2015 to buy a large stake in the H.J. Heinz Co., but then Heinz went on to buy Kraft Foods Group Inc. Buffett has since conceded they paid too much for The Kraft Heinz Company (NASDAQ:KHC).

However, at a lower price and more attractive dividend, could the stock now be a good buying opportunity? Let's take a look.

Gurus

Buffett isn’t the only guru with a liking for the company itself. Several of the investing giants followed by GuruFocus had positions in the company at the close of the first quarter, though Buffett owned the biggest stake at 325,634,818 shares.

First Eagle Investment (Trades, Portfolio) owned 7,174,040 0.59 shares, while Jim Simons (Trades, Portfolio) of Renaissance Technologies held 940,070 shares and Bruce Berkowitz (Trades, Portfolio) of Fairholme Capital Management owned 444,500 shares.

There was a strong burst of buying interest in the final quarter of 2019, but since then, buys and sells have evened out:

GuruFocus Kraft Heinz guru buys and sells

Fundamentals

Kraft Heinz garners a GuruFocus rating of 4 out of 10 for financial strength.

GuruFocus Kraft Heinz financial strength

The GuruFocus system provides two severe warnings: Revenue per share has declined and it keeps increasing its long-term debt. The below five-year chart shows the revenue per share:

GuruFocus Kraft Heinz revenue per share chart

This five-year chart shows that long-term debt and capital lease obligations did grow, but came down slightly in 2019:

GuruFocus Kraft Heinz long term debt chart

In February, two credit rating agencies downgraded their scores on Kraft Heinz to the “junk” level. That will likely result in higher interest costs in the future.

Profitability

GuruFocus Kraft Heinz profitability

While the company scores a reasonable 7out of 10 for profitability, there are several worrying metrics in this table. First, the operating margin is strong, but the net margin is in the single digits, as is its ROE (return on equity). Keep in mind, though, that this is a high-volume industry.

Second, the growth metrics shown at the bottom of the table for revenue, Ebitda and EPS without NRI are all negative, which is not what value or growth investors want to see.

Valuation

GuruFocus Kraft Heinz valuation

We see its current price-earnings ratio is better than it has been in the past twelve months, and is comparable with its peers in the Consumer Packaged Goods industry.

Dividends

GuruFocus Kraft Heinz dividend table

Today’s dividend yield is sitting at just over 5% for Kraft, well ahead of the S&P 500 average of 2%.

Did it get to that height because the board of directors felt the company was doing well, or because the stock price has been declining? The below chart suggests that it was mostly the latter:

GuruFocus Kraft Heinz price and dividend yield chart

Kraft Heinz has a dividend payout ratio of 103%, suggesting dividend payouts are too high to be sustainable. A ratio of 100% means a company is dedicating all its free cash flow to pay dividends, leaving nothing to invest in new growth initiatives. When the payout ratio rises above 100%, as this one has, then the company must be pulling cash from other areas, selling assets, or even borrowing to make the payments.

The three-year dividend growth rate of -12% confirms the bad news in the payout section since a negative number shows the company has been reducing its dividend payments. The following chart shows how the payment has been declining:

GuruFocus Kraft Heinz dividends per share chart

Since the forward dividend yield is the same as the TTM (trailing twelve-month) yield, we know the most recent dividend was the same as the three preceding dividend payments. 

Kraft Heinz’s five-year yield-on-cost is essentially the same as the current yield, which indicates dividend payments have been flat. Theoretically, it should mean that investors who buy now and hold the stock for the next five years, while the company maintains its dividend payments for the next five years at the same rate as over the previous five years, would continue to earn 5.03%.

However, as we’ve seen, the negative dividend growth rate means investors could actually see smaller dividends over the next five years.

The three-year average share buyback ratio is also negative at -0.10, meaning the company has been issuing new shares more than buying back existing shares:

GuruFocus Kraft Heinz shares outstanding chart

Conclusion

Like Buffett, I think investors buying into Kraft Heinz now are likely to be disappointed, and not just over the stock price.

Neither value investors nor income investors are likely to find a lot to like about this company. There are serious issues with both the fundamentals and the dividends.

Disclosure: I do not own shares in any companies named in this article.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website


Rating: 4.0/5 (1 vote)

Voters:

Comments

Praveen Chawla
Praveen Chawla premium member - 3 weeks ago

Robert, Thanks for covering this. I own KHC shares (deeply underwater) but holding. The worst seems to behind it and operating cash flow and free cash flow per share is improving. The reason EPS has taken a hit because of large non-cash write-offs. So its better for now to focus on cash flow to look at improvements rather than GAAP earnings.

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Robert Abbott
Robert Abbott premium member - 3 weeks ago

Thanks for explaining that Praveen!

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