Kraft-Heinz has excellent operating subsidiaries. The Heinz ketchup brand, launched shortly after the American Civil War, has a near monopoly on the American ketchup industry that has been untouched for over two centuries. If it were still a standalone company, it would be one of the top two dozen businesses in the world that you could hold for a 50+ year time frame. Since 2015, it has been merged with Kraft, giving the combined company a towering position in the cheese, ketchup, and grocery store meats categories.
But when you intend to build wealth, using a largely passive approach where you are maniacal in your analysis on the front-end of getting the decision right but taken on a hands-free approach once the pile of capital is allocated and then focus your future gaze towards adding to the collection, you ought to be focused on two components:
The quality of earnings: whether the business model is so strong that it can survive whatever savage storms future economic comditions hurl at it; and
The growth of earnings: Loosely speaking, the capacity to reward investors with returns in the 8-12% annualized range.
When you look at a business like Kraft Heinz, you will find that it has few parallels in the “quality of earnings” department. That is why it is one of the top two dozen businesses in the world. People are going to put Heinz ketchup on food and Philadelphia Cream Cheese on bagels for years and years to come.
The issue with making a Kraft-Heinz investment is that you absolutely have to get the price right because the earnings growth is so slow (the consumer foods giant has grown sales at a 1% rate the past year, and has only averaged 2.4% annual growth in sales since the 3G management team took over the combined company). This means that you must get the price right.
Last year, the stock price hit $97 while the company was earning $3.55 per share in profits. That was a P/E ratio of 28. You absolutely cannot do that if you intend to build wealth with the stable yet slow-growing class of available investments.
You are going to collect the modestly growing dividend, which is nice, but you are not positioning yourself for even satisfactory capital gains.
Nowadays, with the stock at $58 and expected annual profits of $3.85 per share, you are getting a P/E ratio of 15. That is fair. That will position you for adequate investment returns and an ironclad income stream.
It really is amazing how much price does matter in investing. Someone who bought the stock in 2017 owns the exact same ketchup and cheese production as the person who buys in 2018. And yet, the person who buys today gets a 4.1% dividend yield while the person who bought last year only gets a 2.8% dividend yield–last year’s purchaser of Kraft Heinz will have to wait two years before they are earning as much in cash payouts on their investment as the investor of 2018 receives from the get-go. In five to seven years, when the price of the stock is legitimately worth around $120 per share, the Kraft-Heinz investor of 2018 will have doubled their capital (before accounting for dividends) while the investor of 2017 will only have a 20-25% cumulative return.
The way I see it, Kraft-Heinz is positioned to grow its dividend at a rate of about 6.5% annually over the next five years. This means that the investor of today will collect around $17 in total dividends ($20 in total dividends if he reinvests) on an initial investment of $58 per share.
The stability of that 4.3% dividend yield is intriguing. With moderate growth, and reinvestment in a tax-advantaged account, you look to receive about a third of your capital back as your declared share of cash profits over the next five years. That is an impressive amount for a stock that is loaded with subsidiaries that are “sure things” to maintain their profits over the coming five to fifteen years. At 15x earnings, Kraft-Heinz is trading at a fair price for those who want high income now and total returns that have a fair chance of matching the stock market as a whole.
Originally posted 2018-05-17 23:14:06.