The best stock to buy right now: Kraft Heinz vs. Hershey

If you’re looking at the consumer staples sector and trying to find bargains, you’ll want to consider Kraft Heinz (KHC -0.09%) and Hershey (HSY -0.05%). Both own iconic brands, but their stocks have underperformed of late. Kraft Heinz is 20% below its three-year high, while Hershey is about 25% below its three-year high.

Is this an opportunity to get into two great companies, or is one of these food makers a better stock to buy right now?

A comparison of dividends

If you’re an income investor, the first thing you’ll likely examine is a stock’s dividend yield. On this front, Kraft Heinz is outstanding, with a yield of 4.5%. Hershey’s yield is only 2.7%. The word “only” may be a bit of an exaggeration, given that S&P 500 the index yields only 1.2%.

It is also worth noting that the average consumer staples stocks, using SPDR fund for the consumer staples sector as a proxy, it has a yield of 2.6%. So Kraft Heinz has a higher yield, but Hershey’s dividend yield isn’t exactly bad. In fact, it is at the upper end of its historical yield range.

KHC Dividends per Share (Quarterly) data by YCharts.

After the dividend yield, the next key factor to look at is the dividend that supports that yield. This is where Kraft Heinz doesn’t look nearly as good, given the dividend cut just before the start of the 2020s. The dividend has fallen since it was cut. (Kraft Heinz’s yield range isn’t quite as relevant because of the recent discount.)

By contrast, Hershey’s dividend has been rising steadily for years, with an annual growth streak that currently stands at 15 years. If dividend consistency is important to you, Hershey is the clear winner.

Why are investors so negative about Kraft Heinz?

Shares of Kraft Heinz and Hershey are off their highs for good reason. Investors need to understand why before they buy.

In the case of Kraft Heinz, the company was created through a merger of two iconic food manufacturers. The plan was to cut costs to increase profits. This did not turn out as well as hoped, even though some very high-profile investors, notably Warren Buffett of Berkshire Hathawaywere behind the deal.

Ultimately, cutting costs is a difficult way to grow a business. Kraft Heinz had to shift gears, focusing on core elements like innovation and brand building. It also had to reduce debt, which had increased due to the merger.

To be fair, a lot has been accomplished. Kraft Heinz’s plan now is to reduce its portfolio and focus on its best brands. This is a good plan, but recent performance has not been great. For example, the key brands it focuses on in North America, its largest market, saw organic sales decline by 2.4% in the second quarter of 2024.

If this is the result of the company’s new focus, you can understand why investors are taking a show-off attitude. To be fair, Kraft Heinz is better positioned today than it was a few years ago, but this is still a turnaround story.

Why are investors so negative about Hershey?

Hershey’s story is a bit more complicated. First, the company has just upgraded its distribution systems, which has caused a strange wrinkle in its earnings. Prior to switching to the new system, inventory was built up so that retailers would not be left high and dry if there was a problem. That boosted earnings. Now, after a successful pass, that inventory is removed, which lowers earnings.

Hershey’s business is also very seasonal. Holidays lead to increases in demand. But some of the most important holidays for Hershey move between quarters, which has made earnings a bit volatile. It was also negative in the last quarter. Neither of these two issues will be a persistent problem.

KHC data by YCharts.

Harder to pin down is the effect of rising prices for cocoa, a key ingredient in the chocolates for which Hershey is known. Problems in the cocoa supply chain suggest that this commodity may have permanently moved into a higher price range. However, Hershey has long dealt with inflation and commodity price fluctuations, particularly by adjusting prices, products and package sizes. It does this again and in time it will probably be able to cope with higher cocoa prices. Keep in mind that chocolate is a relatively inexpensive luxury for many people.

Even more difficult to assess is the effect of new weight loss drugs that can change the eating habits of consumers. But chocolate is, as mentioned, a low-cost treat that people really like to eat. It seems like the demand isn’t going away, especially when you consider that people are generally bad at sticking to medication regimens over time. This is a bit of a wild card, but like all the other issues facing Hershey today, it doesn’t seem likely to derail the company in the long run.

In other words, investors can be extremely bearish on Hershey today. This could make this a solid contrarian play for investors who think in decades rather than days.

You should probably lean towards Hershey

If your focus is entirely on dividend yield, you’ll probably buy Kraft Heinz. But that company’s problems seem to be a little more difficult to solve and, in particular, self-inflicted. That doesn’t mean it won’t turn the business around, just that the process could be a long one as management works to fundamentally change the way the business is run. With no dividend growth on the horizon, you could be missing out if you buy for yield.

Hershey’s list of woes is a bit longer. Two are temporary (system upgrades and seasonal sales changes). Two are slightly longer-term (cocoa prices and diet pills). But neither seems insurmountable given people’s love of sweets. At this point, it appears that Hershey does not need to fundamentally change its business in any way.

Hershey seems the more attractive investment. Despite all the difficulties, it still raises its dividend consistently — that’s a statement about the company’s expectations for its future.