"Is Kraft Heinz (KHC) The Best Cheap Dividend Stock To Buy Right Now?"

In the world of investing, finding a stock that offers both a high dividend yield and the potential for growth can be like trying to get the last bit of ketchup out of a glass bottle. But what if I told you that Kraft Heinz (KHC) might just be that elusive gem? Let's dive in and see if Kraft Heinz is the best cheap dividend stock to buy right now.



Kraft Heinz has been through a rough patch, with shares stuck in a tight range since 2021 and currently down about 4% in 2024. The company has faced challenges due to shifting post-pandemic consumer spending trends and inflationary cost pressures. However, recent quarterly earnings have shown signs of a budding operational and financial turnaround, which could support a positive long-term outlook.

One of the key indicators of Kraft Heinz's potential recovery is its adjusted earnings per share (EPS) for the first quarter of 2024, which climbed by 1.5% year over year to $0.69. This increase was driven by a solid expansion in the adjusted gross margin, which reached 34.5% from 32.8% in the prior-year quarter. This improvement in margins indicates that the company is successfully balancing lower volumes with pricing initiatives, which has supported profitability. Additionally, while total revenue declined by 1.2% from Q1 2023, organic net sales fared better, down by just 0.5%. This suggests that the company is focusing on an ongoing sequential improvement in volumes compared to weaker trends in 2023. Management believes the global operation is approaching a "volume inflection," with positive growth expected into the second half of this year. This theme plays into the 2024 outlook that has been reaffirmed, with Kraft Heinz guiding for full-year positive organic net sales growth between 0% to 2%, and adjusted EPS is forecast to increase in a range of 1% to 3%.

In comparison to its peers in the consumer staples sector, Kraft Heinz's price-to-earnings (P/E) ratio is trading at approximately 11.5 times the 2024 consensus EPS of $3.03. This earnings multiple is at a discount compared to packaged food peers like General Mills and Campbell Soup, which trade at a ratio around 14.6 times forward earnings. This suggests that Kraft Heinz's stock may be undervalued and could deserve a larger premium as it gets back on track. Furthermore, Kraft Heinz offers a compelling dividend yield of 4.6%, which is well above its industry group average of 3.7%, from packaged foods peers like General Mills, Hormel Foods, and Campbell Soup. This high dividend yield, combined with the company's successful debt reduction in recent years and consistent free cash flow, suggests that the dividend payout is sustainable for the foreseeable future.

However, there are potential risks and challenges that Kraft Heinz faces in its efforts to achieve positive organic net sales growth and improved profitability. These challenges could impact its stock performance in various ways. One of the main risks is the shifting post-pandemic consumer spending trends, which have limited growth and earnings. As mentioned, "The impact of shifting post-pandemic consumer spending trends while dealing with inflationary cost pressures has limited growth and earnings." This ongoing challenge could continue to affect sales and profitability, making it difficult for the company to achieve its growth targets. Additionally, inflation has been a significant factor affecting Kraft Heinz's operations. The company has had to balance lower volumes with efforts to raise pricing to support profitability. As noted, "Efforts to raise pricing helped balance lower volumes while supporting profitability." However, if inflation continues to rise, the company may face further challenges in maintaining profitability, which could negatively impact its stock performance.

Another risk is the uncertainty surrounding the expected volume inflection. While management believes the global operation is approaching a "volume inflection" with positive growth expected into the second half of 2024, there is no guarantee that this will materialize. If the expected volume inflection does not occur, it could lead to continued declines in sales and profitability, potentially causing the stock to underperform. Furthermore, Kraft Heinz's strategy to focus on a small number of higher-performing brands has not been entirely successful. For example, "third-quarter 2024 organic sales for the brands management is focusing on fell 4.5%, while the other brands in its portfolio grew organic sales." This indicates that the company's efforts to streamline its portfolio may not be yielding the desired results, which could impact its ability to achieve positive organic net sales growth.

In conclusion, Kraft Heinz offers a compelling dividend yield and has shown signs of a budding operational and financial turnaround. However, there are potential risks and challenges that investors should consider before making an investment decision. If you have a long investment timeframe and are willing to collect that lofty yield while you wait for management to figure things out, Kraft Heinz could be an attractive option. After all, Kraft Heinz has a large and important portfolio of brands to offer. You just have to go in knowing that it could take a little while before you start to see more positive results. Assuming it does, eventually, get back on track, buying now could end up setting you up with a lifetime of income.