Warren Buffett’s High-Yield Stock Pick: Why Kraft Heinz Remains a Key Holding

Billionaire investor Warren Buffett, renowned for his savvy investment strategies, has long emphasized the value of companies that reward shareholders through dividends. His company, Berkshire Hathaway, holds a diverse portfolio of 45 stocks and exchange-traded funds (ETFs), but only one stands out with a substantial 5% dividend yield: Kraft Heinz. Despite the ups and downs of this investment, Buffett’s faith in the company remains steadfast.

The Kraft Heinz Investment: A Decade of Lessons

Buffett first ventured into Kraft Heinz in 2013, partnering with 3G Capital to acquire Heinz. Two years later, Kraft Foods and Heinz merged, creating one of the largest food companies in the world. While the deal initially seemed promising, the investment has struggled over the years. Kraft Heinz’s stock price has been flat over the past five years and is down approximately 33% overall since the merger.

In 2019, Buffett openly admitted on CNBC’s Squawk Box that Berkshire overpaid for Kraft. “I was wrong in a couple of ways about Kraft Heinz,” he said. Yet despite the challenges, Kraft Heinz remains a significant part of Berkshire’s portfolio, accounting for roughly 3.3% of its over $300 billion equity investments. Berkshire Hathaway also owns nearly 27% of the company, making it one of Kraft Heinz’s largest stakeholders.

A Dividend Worth Watching

What sets Kraft Heinz apart in Buffett’s portfolio is its 5.18% dividend yield, a rare find in today’s market. For income-seeking investors, this makes Kraft Heinz an attractive option, particularly as interest rates eventually decline and other high-yield investments like Treasury bills and CDs become less competitive.

The company’s dividend payout ratio, however, has raised eyebrows. At approximately 142%, Kraft Heinz is paying out more in dividends than it generates in earnings. While this may concern investors, much of this imbalance stems from recent impairment losses, which are not central to the company’s core business. When adjusted for these losses, Kraft Heinz’s earnings have actually grown by 4% year over year.

Furthermore, the company reported free cash flow of more than $2 billion during the first nine months of 2024, a 10% increase from the previous year. With $450 million paid in dividends each quarter, Kraft Heinz’s dividend appears sustainable, even if there isn’t much room for increases in the near term.

Challenges and Turnaround Efforts

Despite its high dividend yield, Kraft Heinz faces significant challenges. Net sales have declined this year, and the company still carries $19.4 billion in debt, even after paying down substantial amounts over the past five years. Additionally, the company has not raised its dividend since cutting it in 2019, signaling limited flexibility in its financial strategy.

However, Kraft Heinz’s valuation remains appealing, with a forward price-to-earnings ratio of around 10. For value-oriented investors, this could present an opportunity as the company continues its turnaround efforts. Buffett’s unwavering confidence in Kraft Heinz, underscored by the fact that Berkshire has never sold a single share, further bolsters its appeal as a long-term investment.

Why Kraft Heinz Still Fits Buffett’s Strategy

Buffett has always valued companies that return capital to shareholders, and Kraft Heinz exemplifies this philosophy. While the investment hasn’t delivered stellar capital appreciation, the consistent dividend yield aligns with Berkshire Hathaway’s focus on passive income. For investors looking for steady cash flow, Kraft Heinz is a compelling choice, especially in a high-interest-rate environment.

As interest rates eventually decrease, the 5% yield offered by Kraft Heinz will become even more attractive to income investors. The company’s dividends, coupled with its efforts to streamline operations and reduce debt, position it as a reliable source of income during turbulent market conditions.

The Bigger Picture: Buffett’s Patience Pays Off

Buffett’s investment philosophy emphasizes patience and long-term thinking, both of which are evident in his approach to Kraft Heinz. While the company has faced setbacks, its ongoing efforts to stabilize earnings and maintain a sustainable dividend payout suggest potential for future growth. Buffett’s ability to weather these challenges and maintain his stake demonstrates the importance of focusing on fundamentals rather than short-term performance.

For income-seeking investors, Kraft Heinz offers a unique opportunity to benefit from a high dividend yield while investing in a household name with a strong presence in the consumer staples sector. As the company works through its challenges, it may emerge stronger, rewarding investors who are willing to stay the course.

Final Thoughts: A Dividend Stock Worth Considering

Kraft Heinz may not be the shining star of Berkshire Hathaway’s portfolio, but its 5% dividend yield makes it a standout for passive income investors. While challenges remain, the company’s commitment to returning capital to shareholders and its potential for long-term improvement align with Buffett’s investment principles.

For investors seeking reliable income and a potential turnaround story, Kraft Heinz is worth watching. As Buffett’s investment strategy has shown time and again, sometimes patience and a steady hand can turn even the most challenging investments into success stories.