Kraft Heinz: A High-Yield Gamble Amidst Challenges
The main draw for Kraft Heinz (NASDAQ: KHC) as 2025 begins is its impressive 5.2% dividend yield. This is significantly higher than the average yield of 2.5% among consumer staples companies. However, such a high yield brings additional risk, especially after the company’s 2024 plans fell flat. Here’s what you should know as Kraft Heinz enters a new year.
Bumpy Roads Since Merger
Experiencing tough times is common in business, but Kraft Heinz has faced a prolonged struggle. The challenges began after the 2015 merger of Kraft and Heinz, executed by 3G Capital with the backing of Warren Buffett’s Berkshire Hathaway.
The merger aimed to enhance profitability through cost-cutting strategies. Initial efforts showed promise, yet progress stagnated when it became clear that cutting costs alone wouldn’t drive growth. Consequently, Kraft Heinz underwent leadership changes, and 3G Capital sold its stake in 2023. Management has since shifted focus towards shedding less profitable brands and concentrating on core products.
This strategy mirrors the successful turnaround seen at Procter & Gamble a few years back and the ongoing recovery at Unilever. Yet, Kraft Heinz has struggled to find similar success and continues to fall short of ambitious targets.
Declining Sales Raise Concerns
At the beginning of 2024, Kraft Heinz set modest goals for organic sales growth between 0% and 2%. However, the first quarter saw a decline of 0.5%, even as its “Accelerate” segment showed a slight increase of 0.5%. The second quarter turned grim, with organic sales plummeting 2.4%, including a similar drop in the Accelerate segment. By the third quarter, overall sales fell 2.2%, while the Accelerate business experienced a more alarming 4.5% decline. This downward trend is troubling for a company trying to refocus its efforts.
Kraft Heinz is on track to miss its initial targets for 2024, which explains why the stock remains less favorable compared to other consumer staples. In contrast, Unilever managed to boost its sales by 4.5% in the third quarter. Although both companies are pursuing similar strategies, Kraft Heinz’s current execution has not been effective, leading to ongoing challenges.
Despite these setbacks, Kraft Heinz holds potential. Its past strategies have seen success elsewhere, and with a diverse portfolio of significant brands, a slight shift could potentially lead to a more promising 2025.
The Allure and Risks of High-Yield Kraft Heinz
Despite its attractive yield, many investors may hesitate to purchase Kraft Heinz stock until tangible progress is visible. Yet, for those willing to accept the risks, the company’s current strategy could yield results in the long term. The unfavorable performance in 2024 may set the stage for a recovery in 2025; however, potential buyers should remain cautious of management’s ability to execute effectively.
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Reuben Gregg Brewer has positions in Procter & Gamble and Unilever. The Motley Fool has positions in and recommends Berkshire Hathaway. They also recommend Kraft Heinz and Unilever. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
