Questioning the Security of Kraft Heinz's 4.8% Dividend Yield
High-earning dividend shares can be alluring options for investors. These returns can produce consistent income and enhance overall profits derived from owning the stock.
However, whenever a yield is near 5%, it's advisable to ponder if it's secure. The goal is to purchase a stock for its dividend, without encountering a payout reduction in the imminent future.
Presently, Kraft Heinz (KHC, 1.46%) offers a considerable dividend, yielding approximately 4.8%. Not so long ago, the renowned food corporation reduced its payout to maintain a more reasonable level.
Following the company's recent financial reporting displaying lackluster figures, there's speculation about a forthcoming dividend reduction, or is it a more secure dividend stock than it appears?
Are Kraft's profits robust enough to maintain its current dividend level?
In the past year, Kraft generated $26.1 billion in sales, but its profit margin on that was slender, with total net income amounting to $1.4 billion. In the most recent period, the enterprise reported a net loss of $290 million, primarily due to impairment losses related to goodwill and intangible assets - over $1.4 billion.
In the preceding four quarters, Kraft's diluted earnings per share were $1.11, less than its $1.60 annual dividend payout per share. This equates to a payout ratio of over 144%.
Given such a high payout ratio, one might consider the dividend as unsustainable and that a reduction may be on the horizon (the company reduced its dividend in 2019).
However, this showcases a key limitation of the payout ratio; a negative impact on earnings from one quarter might make the dividend appear unsustainable. Although Kraft reported a loss in the last quarter due to noncash impairment write-downs, it may not accurately represent the company's capacity to sustain the current dividend.
Another method for investors to assess the safety of Kraft's dividend
Instead of relying on earnings, investors can utilize free cash flow (FCF) to evaluate if the company's dividend is manageable. As this focuses on cash flow alone, it excludes the impact of noncash charges such as impairment.
Last quarter, Kraft's FCF totaled $849 million, and in the past year, the company has produced over $3 billion in FCF. Over an entire year, Kraft pays under $2 billion on cash dividends, indicating that the dividend is secure based on its FCF.
Kraft disclosed its $0.40 quarterly dividend payment on Oct. 30, coinciding with the company's latest earnings announcements, which suggests that, at least for now, they aren't overly concerned about their capacity to maintain the current dividend.
Is Kraft a safe dividend stock to invest in?
The company's dividend is more secure than it seems, as its FCF allows for continued regular payments. Furthermore, there might even be room for future increases, albeit not guaranteed. Overall, if you're in search of a good dividend stock, Kraft Heinz can be an excellent addition to your portfolio.
Based on its free cash flow, Kraft Heinz has the capacity to continue paying its dividend, as its FCF exceeded its dividend payments in the past year. Furthermore, the company's recent dividend declaration suggests that they are confident in maintaining their current dividend. However, given the company's high payout ratio and past dividend reduction, investors should carefully consider the long-term financial health of Kraft Heinz before making an investment decision.
