5 reasons to buy Kraft Heinz stock like there’s no tomorrow

Kraft Heinz (KHC 1.10%) has been a disappointing investment since it was created out of the merger between Kraft and Heinz nine years ago. Shares of the combined company opened at $48.55 on July 6, 2015, but are now trading just below $36.

Kraft Heinz was initially considered a stable consumer staples stock, but it rattled investors in 2019 with a $15 billion divestment of its top brands, a dividend cut and the disclosure of an SEC probe into practices his accountants. Its then-CEO, Bernardo Hees, resigned a few months after making these announcements.

Image source: Getty Images.

Hees’ successor, Miguel Patricio, guided the company through challenges until he stepped down and handed the reins to Carlos Abrams-Rivera last year. Under the two CEOs, Kraft Heinz stock has stabilized and is up about 14%. It’s still well below its debut price, but I think it’s worth buying for five simple reasons.

1. Kraft Heinz has overcome its past problems

Many of the Kraft Heinz brands struggled when Patricio took the helm. Consumers were gravitating toward healthier foods, and large grocery chains were evolving into fierce competitors with their own private labels. Instead of streamlining its portfolio, refreshing its products and launching new marketing campaigns to avoid these threats, Kraft Heinz’s management focused too much on cutting costs and buying back its stock to increase its earnings per share (EPS).

But under Patricio, Kraft Heinz divested its weaker brands to raise cash, acquired higher-growth brands and refreshed its classic brands with new products and marketing campaigns. These strategies have put it in a good position to grow in 2020 and 2021 as the COVID-19 pandemic has driven more people to stock up on packaged foods. It also countered inflationary headwinds in 2022 and 2023 by gradually increasing prices.

2. Its top-line growth has stabilized

Kraft Heinz’s net sales growth — which includes divestitures, acquisitions and currency fluctuations — has been flat over the past five years. However, its organic sales have remained positive over the past four years as it reorganized its brand portfolio.

Data source: Kraft Heinz.

Its organic sales are expected to fall 0% to 2% this year as it runs out of room to raise prices in its developed international markets. This pressure is offsetting successful price growth in North America and its emerging international markets.

This slowdown might seem like a red flag, but its growth should pick up again as inflation finally subsides. It has also expanded its home segment with new products for restaurants and businesses, refreshing its older brands with new products and mulling a divestment of Oscar Mayer to further streamline its organic growth. For now, analysts expect its net sales to grow at a slow but steady compound annual growth rate (CAGR) of 1% from 2023 to 2026.

3. Kraft Heinz’s gross and operating margins are growing

Kraft Heinz’s gross and operating margins were both compressed by inflation in 2022, but both have expanded significantly over the past 18 months.

Source: YCharts.

For 2024, the company expects adjusted gross margin to expand by 75 to 125 basis points and adjusted operating margin to increase by one to three percentage points. Adjusted EPS is also expected to rise 1% to 3% to $3.01 to $3.07 per share. Analysts expect reported EPS to grow at a CAGR of 13% from 2023 to 2026.

4. Kraft Heinz has a low valuation and a high dividend yield

At $35, Kraft Heinz shares are trading at just 12 times the midpoint of this year’s earnings. In comparison, its peers in the industry General Mills and Mondel trade at forward earnings of 16 and 21 times respectively. Kellanovawhich recently agreed to be acquired by Mars, trades at 22 times forward earnings. That low valuation, along with its high forward dividend yield of 4.5%, should limit Kraft Heinz’s downside potential.

5. Warren Buffett still owns this stock

Last but not least, Warren Buffett’s Berkshire Hathaway — who co-orchestrated Kraft’s merger with Heinz — continues to own 26.9 percent of the company’s outstanding shares. That $11.5 billion stake represents 3.7% of Berkshire’s portfolio and has not been reduced or liquidated in recent sales of several major stocks.

Buffett’s decision to stick with Kraft Heinz suggests his business is not headed for a cliff. It certainly won’t explode anytime soon, but it should be a good place to park your money and collect some decent dividends until macro headwinds die down. So if you’re looking for a good stock to buy as a safe haven right now, Kraft Heinz checks a lot of the right boxes.