This report is going to center around Kraft Heinz (KHC), one of the world’s largest packaged foods companies, which has fallen from a close of $48.18 on Feb 21 to a close of $33.19 on Feb 28, a 31% decline in 5 days of trading. This is in response to Kraft Heinz writing down or devaluing some of its core brands by $15 billion dollars and reducing its quarterly dividend from 0.62¢ to 0.40¢.
This move serves to underscore my position about reported earnings, sales, balance sheet values, etc. They are all subject to accounting gimmicks and unfortunately it’s all perfectly legal. That means those “reported” earnings everyone gets so bent out of shape over can be made to reflect anything the company wants them to. Items like the monetary values assigned to the goodwill of brands, which is the value Kraft Heinz restated, are no different. They are all largely an illusion, accounting ghosts if you will. Sure some are valid, but some are not. From the outside looking in, how are we to know which ones are real and which ones are just paper numbers. Your guess is as good as mine. Even Warren Buffett now says he overpaid for Kraft Heinz. If he doesn’t know the real value, how are we supposed to know? But that doesn’t mean we shouldn’t be investors in stocks in general, especially if we have a long-term view and recognize opportunities when they arise.
This situation is exactly why I look to dividends instead of earnings as the measure of a company. So to me, what’s more important than the write down of the Kraft and Oscar Meyer brands, is that Kraft Heinz cut their quarterly dividend from .062¢ to 0.40¢. That is an action involving a real number. It was a reduction of around 35% which is very close to the 33% decline in the stock price from $48.18 to the recent low of $32.02. That’s a very close correlation, and viewed in that light, a reaction that actually makes some sense.
The 0.40¢ quarterly dividend gives us a forward dividend of $1.60 which results in a forward yield of 4.8%. So yes the dividend has been reduced. But it hasn’t been omitted, or even drastically slashed. Plus, Kraft Heinz still created lots of money last quarter selling the same products they’ve been selling for years and will continue to sell. That means people are still buying their products. I bought some Kraft cheese and Oscar Meyer bacon yesterday myself. And when I use that up, I’ll buy some more and so will a lot of other folks.
So guess what. I don’t think Kraft Heinz is going out of business tomorrow or the next day or next month or next year. Warren Buffet himself said he expects to still be holding Kraft Heinz stock 10 years from now. So what you have now is a classic “oversold” opportunity to buy stock in a “legacy” type company for 33% of what it was selling for just a week ago, and you’ll receive a 4.8% dividend yield for doing so as well.
Will Kraft Heinz reduce its dividend or write off another value again? I don’t know and neither does anyone else outside of the company. They might not even know themselves, but the probability is that they won’t. Will they keep the dividend where it is in the future while they work their way through this process? Maybe so.
If you want to see a similar situation all you have to do is go back to the year 2000 and examine the defense products company Lockheed Martin (LMT). Lockheed Martin cut its quarterly dividend from 0.22¢ to 0.11¢, a 50% reduction. The issues involved with the reduction were different than Kraft Heinz but the outlook going forward at that point for Lockheed Martin was very similar. They made defense products that were going to remain in demand all over the world. In a little over a year the stock had gone from a close of $51.88 to a close of $17.44, a 66% decline. The company held the dividend at 0.11¢ for several years after that while the company worked through the situation. Today Lockheed Martin has a quarterly dividend of $2.20 and a stock price of $300. Investing in stocks when they’re “on sale” can be very rewarding if you are patient, have reasonable expectations, and maintain a long-term outlook.
Yes they are two different companies in two different industries in two different sectors. Apples to oranges maybe. But it does point out what can happen, especially with a “legacy”, blue-chip level company that has ever reason to remain in business making money for years and years to come. Was it painful in the short-term? Yes. Was it profitable in the long-term? A stock price of $300 today versus $17.44 in 2001. You be the judge.
Will this happen for Kraft Heinz? It’s the future. No one knows. Is it a good investment at this price and yield? That’s for you to decide but Kraft Heinz has a long profitable history and large stable of products that says it very well might be. It has all the appearances of one of those situations that falls directly into the Warren Buffett “be fearful when others are greedy and greedy when others are fearful” scenario. Only time will tell.
If Kraft Heinz seems like a reach or has too much uncertainty for you, here are some other companies to consider.
Southern Company (SO), an electric utility, closed at $49.69 with a forward dividend yield of 4.8% that is inline with its 5 year median yield. The close is only 5% above the 60 month moving average.
Dominion Energy (D), an electric utility, closed at $74.09 with a forward dividend yield of 4.5% that is 15% larger than the 5 year median of 3.9%. The close is only 1% above the 60 month moving average.
General Mills (GIS), one of the world’s largest packaged foods companies, closed at $47.13 with a forward dividend yield of 4.2% that is 33% larger than the 5 year median of 3.1%. The close is 14% below the 60 month moving average and a 34% correction from the 5 year high monthly close of $71.89. General Mills has moved up recently from a 6 year low monthly close of $38.94 in December 2018 but is still firmly in “on sale” territory. Stock prices of almost all of the packaged foods companies have been under pressure lately.
Exxon Mobil (XOM), one of the world’s largest integrated oil/energy companies, closed at $79.03 with a dividend yield of 4.1% that is 44% larger than the 5 year median of 2.9%. The close is 7% below the 60 month moving average and a 23% correction from the 5 year high monthly close of $102.41. Exxon Mobil has moved up recently from an 8 year low monthly close of $68.19 in December 2018 but is still residing in “on sale” territory.