The biggest attraction of Kraft Heinz (KHC -0.52%) as 2025 gets underway is most likely its lofty 5.2% dividend yield. The average consumer staples company is yielding just 2.5%, less than half as much. That higher yield, however, comes with added risk, because Kraft Heinz’s big plans for 2024 turned out to be a letdown. Here’s what you need to know if you are looking at Kraft Heinz as Wall Street enters a new year.
Kraft Heinz has fallen short before
It isn’t unusual for companies to go through difficult periods. In fact, it happens all the time, and business downturns can actually be a good time to buy a stock. However, Kraft Heinz’s rough patch has been a fairly long one. It really started when Kraft and Heinz merged in 2015. The deal was orchestrated by 3G Capital and supported financially by Warren Buffett’s Berkshire Hathaway.
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The famed Oracle of Omaha’s imprint wasn’t a great indicator of success in this case, however. The original goal was to boost profitability by cutting costs. There was progress at the get-go, but it stalled when it became increasingly obvious that Kraft Heinz couldn’t cut its way to growth. That led to an overhaul in the food maker’s leadership ranks, and 3G Capital eventually sold all of its stake in 2023. Management created a new plan to slim down by exiting less desirable businesses and refocusing around the company’s most important brands.
To be fair, that’s the same approach that consumer staples giant Procter & Gamble used to get out of a funk a few years earlier. It’s also the one that Unilever is using right now to turn its business around. But Kraft Heinz hasn’t been having as much success as it would like. It’s effectively falling short again on management’s big plans.
A steady decline is a bad sign at Kraft Heinz
As 2024 got underway, Kraft Heinz had modest but reasonable goals. It was targeting organic sales growth of between 0% and 2%. In the first quarter, organic sales fell 0.5%, but it managed to grow organic sales by 0.5% in its “Accelerate” businesses, which are the ones on which it was refocusing its efforts. So, overall, the news was still at least a little positive.
In the second quarter, organic sales dropped a much more worrying 2.4%, with the Accelerate business witnessing a similar 2.4% decline. That was not even remotely good news. Then, in the third quarter, overall organic sales dropped 2.2%, with the Accelerate business off by 4.5%. The trend is clearly going in the wrong direction for businesses that Kraft Heinz is supposed to be focusing on with all its effort.
At this point, Kraft Heinz is likely to fall well below its initial targets for 2024. That’s not a great outcome, and it helps explain why the stock remains so unloved relative to the broader consumer staples space. Note that Unilever, which is also working on a business turnaround, was able to increase sales by 4.5% in Q3 2024. This comparison, however, is something of a mixed signal.
The path Kraft Heinz is traveling is one that worked for other companies and is working right now for Unilever. So it isn’t on the wrong path, per se. But right now, Kraft Heinz isn’t executing particularly well in its efforts to slim down and refocus on its best brands. It isn’t giving up just yet, and for more aggressive investors, there are some reasons to be positive.
Most notably, the cost-cutting efforts in the early years of the Kraft Heinz merger likely left the company behind its peers in many ways, including in the important spaces of innovation and marketing. These are skills that require time and money to build — or, in this case, rebuild. It isn’t shocking that it would take a little while for Kraft Heinz to hit its stride again.
It’s very possible that 2024 was a transition year for a company that still owns a portfolio of very large and important brands. It wouldn’t require much of a business shift for 2025 to shape up to be a much better year, given the weak comparisons that 2024’s results will offer.
High-yield Kraft Heinz is an acquired taste
Despite its lofty yield, most investors probably won’t want to buy Kraft Heinz stock — at least, not until there’s more progress made toward stemming downtrends in the businesses around which the company is refocusing its efforts.
That said, more aggressive investors might want to take on the added risk here. Kraft Heinz is running a playbook that has worked for other companies, and it still has notable brands backing its business. The less-than-impressive results in 2024 might actually set up a rebound in 2025. Just go in knowing that there’s a risk that management’s poor execution could continue, which would be bad for the business and the stock price.
Reuben Gregg Brewer has positions in Procter & Gamble and Unilever. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz and Unilever. The Motley Fool has a disclosure policy.
