Dividend stocks can provide investors with a great source of recurring income. But if those payouts aren't safe, there's a risk that the dividend could end up getting cut or eliminated entirely. If that happens, the stock price could also fall drastically, especially if the dividend was the primary reason for investing in the company.
That's the main motivation for investing in consumer goods giant Kraft Heinz (NASDAQ: KHC). The stock's 4.6% dividend yield is more than 3 times higher than the S&P 500 average yield of just under 1.4%. Investors can get a lot of bang for their buck when it comes to dividends. But there's a problem: Kraft's profits plunged last quarter. Is the dividend still safe?
Kraft's net income falls 15% in Q4
On Feb. 14, Kraft reported its fourth-quarter results for the last three months of 2023. Net sales of $6.9 billion were down by 7.1% on a year-over-year basis. And for the full year, the top line only rose by 0.6%. The food company has been able to rely on rising prices to help offset the effect of inflation, but customers have been pushing back, so volumes were down 4.4% in Q4.
Last quarter, the company posted net income of $757 million, which declined by 14.6% from the prior-year period when Kraft's earnings came in at $887 million. Investors shouldn't expect a huge turnaround this year, either. For 2024, Kraft projects organic net sales growth of no more than 2%. Its earnings per share (EPS), on an adjusted basis, are predicted to grow between 1% and 3%.
Can Kraft still afford to pay its dividend?
Investors can gauge the safety of a stock's dividend by looking at its payout ratio, which compares earnings against the quarterly payout, to see how much of earnings are being paid out as dividends. In Q4, Kraft's diluted EPS was $0.61. The good news for investors is that that's still higher than the $0.40 that Kraft currently pays investors in dividends each quarter.
If Kraft stays at around that rate, then its payout ratio for the year will be around 66%, which shouldn't pose a significant risk for investors. Another way to evaluate the dividend is by looking at cash flow. Last year, Kraft generated just under $3 billion in free cash flow, which is also well above the nearly $2 billion in dividends that it paid out to shareholders during the year.
Regardless of whether you look at cash flow or earnings, the numbers suggest that Kraft's dividend is still sustainable.
Is Kraft Heinz stock a good buy today?
Kraft's stock has been an underwhelming buy over the years. Since 2021, it is up around just 1%, while the S&P 500 has generated returns of more than 36%. The stock is trading at a forward price-to-earnings multiple of 12, which is cheap. But with a lack of growth, the discount shouldn't come as a big surprise given the challenges Kraft faces amid weakening economic conditions.
However, this can still be a potentially good dividend stock to hang on to for the long term, as Kraft has many strong brands in its portfolio. And with a decent valuation, a sustainable payout ratio, and potentially better economic prospects over the long term, it may still end up being a good, conservative investment to hang on to in your portfolio.
As long as you temper your expectations for the stock and are holding it primarily for its dividend, Kraft may be a good pillar for your portfolio. Although it reduced its payouts in 2019, the dividend doesn't appear to be in any imminent danger today.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
