Going Long for Kraft Heinz: A Dividend Play and Growth

Kraft Heinz recently announced a dividend increase, putting yield at over 3%

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Nov 23, 2015
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Finding a company for a good long position and a little regular income is not an easy feat. The larger dividend yields tend to be offered by mature companies with little debt that may not need to reinvest all of their earnings. Retaining that cash would have resulted in a cash surplus and shifted the companies’ capital structures. It also helps attract investors when year over year growth is not very high.

Take the Kellogg Company (

K, Financial) for example. It is trading at $66.25 with a one-year target estimate of $69.50 – an increase of less than 5%. The company pays a 3.03% dividend yield, and this brings the annual return an investor can expect closer to a respectable 8%. McDonald’s Corp. (MCD, Financial) takes a similar stance. The company is trading at $113.91 on a one-year target estimate of $117.57 (an increase of over 3.2%), and it pays a dividend yield of 3.2%, meaning investors could expect returns of around 6.5% for a 12-month position.

It may not be much, but it makes a good hedge and adds some stable income to your portfolio. Just look at Kellogg compared to the S&P 500; when one goes up, the other goes down:

But, what if you could get growth and a high, stable dividend? Enter Kraft Heinz Company (

KHC, Financial).02May2017185648.jpg

The Kraft Heinz Company

This company was formed through a merger between Kraft Foods Group (the company formerly known as KRFT on the NASDAQ) and Heinz. Berkshire Hathaway and 3G Capital facilitated the move and will remain involved.

Warren Buffett (Trades, Portfolio) will sit on the board and 3G Capital partner Bernardo Hees, who served as the CEO of Heinz after the pair took the company private in 2013, will retain the helm.

Kraft Heinz has been publicly traded since July 6. Since then, it has moved with the S&P 500, but above it:


Kraft Heinz going forward

Kraft Heinz opened trading at $71. It rose briefly to top $81 in August before falling to $61.42 a few weeks later, and ultimately settling in the mid-$70’s. The consensus estimate is that the company will top $90 per share in the next year. If you buy in at $75 per share, that is a 20% increase. Even if the company misses that mark, a strong return is likely.

It all comes from the restructuring plan the merged company is going to adopt in order to take advantage of the synergies between the Kraft and Heinz brand portfolios. "The Kraft restructuring plan thus far entails a 10% reduction in the workforce with half at the headquarters level and half in the supply chain,” said Robert Moskow, a Credit Suisse analyst. “But Heinz' workforce shrunk by 27% after 18 months under 3G's management.”

Hees trimmed the company down as far he needed to for operations to be lean at Heinz, and it worked. Given the likely overlap of many roles between Heinz and Kraft and the probable redundancies, it is entirely likely that what looks like a 10% reduction now may ultimately increase. Moreover, some cost savings are going to come from the merger even if Hees does not pare it down. Moskow explains, “the Kraft Heinz combination can achieve if not exceed expectations for EBITDA growth even if revenue continues to decline."

Dividends: The cherry on top

With all this, dividends really are the cherry on top. Kraft Heinz announced a $2.20 dividend yield (55 cents per quarter) when the company opened for public trading on July 6 – and it has already increased that figure. The company announced on Nov. 5 that it would bump that figure to $2.30 per year (57.5 cents per quarter). This puts the company’s dividend yield over 3%, and 20% higher than the average for the Consumer Goods industry, which stands at 2.53%.

It is all part of Kraft Heinz’s commitment to maintaining a strong and increasing dividend. Kraft has a long history of paying dividends. As Kraft Foods, it had paid a steadily increasing dividend since 2012, and the merged company looks to be following suit. In this chart from the Kraft Heinz Investor Relations website, you can see that Kraft Heinz is continuing in Kraft Foods’ footsteps:


The final takeaway

Nothing in the stock market is guaranteed, but if you are looking for a way to earn dividend income from your portfolio and enjoy long-term growth, Kraft Heinz is a good position. Institutional investors are already getting in on the opportunity. Over 10% of the company’s stock is held by institutions, including Daniel Loeb's Third Point, and now that the dust (and momentum) from the merger is settling, the timing is good.

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