Interactive Investor

I still rate this high-yield Warren Buffett stock a buy

Its next set of results are expected to show an improvement, and overseas investing expert Rodney Hobson thinks there could be upgrades. It’s just one of the reasons he’s backing this famous business.  

3rd July 2024 08:23

by Rodney Hobson from interactive investor

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Mixed messages have come out of food and beverage group The Kraft Heinz Co (NASDAQ:KHC) so far this year. However, it has stuck to its full-year guidance and the tasty yield is another positive factor at this favourite stock held by fabled investor Warren Buffett.

Kraft’s next figures, to the end of June, will be released later this month but shareholders will be hoping for better signs of progress than they got in the final quarter of last year and the first one this year.

Net income slipped 3.9% to $804 million in the three months to the end of March, with net sales 1.2% lower at $6.4 billion. Adverse changes in foreign currency exchange rates did not help but were far from being the full story. The sales mix was less favourable and there was also a small decrease in volumes.

However, Heinz has been buying back shares so the profits are being spread less thinly. Adjusted earnings per share actually rose 1.5% and the dividend has been maintained at 40 cents per share each quarter.

At least the dire results in the final quarter of 2023, when net sales fell 7.1% and profits slumped 15%, were not repeated even though Heinz is currently up against strong comparatives in the first nine months of last year before it all turned sour.

The group still expects full-year organic net sales growth, though admittedly only 2% at best, with earnings per share up a meagre 1-3%, more if share buybacks continue. That suggests a decent pick-up as the year progresses and does allow for some upgrading of expectations. Heinz had already indicated that it expected volumes to pick up in the second half of this year and comparatives will get easier.

At around $32 the shares are back where they were five years ago. Since then, they have bounced between $22 and $44 but the current level has proved to be a floor for the past four years. The price/earnings ratio at 14 is really comfortable for a company of this quality, and the 5% yield is high for an American stock.

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Source: interactive investor. Past performance is not a guide to future performance.

Hobson’s choice: I have tipped Heinz at $40 and $38 in the past so I must admit the company has not performed as well as I had hoped. Quarterly sales figures have been patchy over the past four years, but major issues such as supply chain disruptions and high inflation look to be mercifully in the past. That juicy yield has provided adequate compensation and there is the comfort of knowing that we have to eat – and so do people in the 190 countries across America, Europe and emerging markets that Heinz serves.

I rate Heinz a buy up to at least $36, where there could be resistance. If the next set of results are favourable, as I think they will be, then the shares should be heading back above $40 before the summer is out.

Heinz is a big favourite with institutional investors, which is a clear vote of confidence, and the nine biggest shareholders own just over half the business, leaving comparatively few shares to be actively traded. Continued share price volatility is therefore quite likely, making this a stock for traders as well as for longer term investors.

Update: Nothing succeeds like failure at aircraft manufacturer Boeing Co (NYSE:BA), where the chief executive has received a 45% pay rise for presiding over continued chaos. Now the workforce has put in a request for a mere 40%. Meanwhile, a Ryanair Boeing has dropped 2,000 feet at alarming speed for no obvious reason. The shares are inexplicably back up to $186. Sell while you can get out.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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