close
close

Association-anemone

Bite-sized brilliance in every update

Is Kraft Heinz’s 4.8% Dividend Yield Safe?
asane

Is Kraft Heinz’s 4.8% Dividend Yield Safe?

Should investors avoid Kraft stock, or could this be an undervalued income stock to buy right now?

High-yielding dividend stocks can be attractive options for investors. Their payouts can generate a lot of recurring income and boost overall returns from stock ownership.

But anytime a yield is around 5%, it’s worth asking if it’s safe, because the last thing you want is to buy a stock for its dividend, only to have the payout cut in the near future.

Kraft Heinz (KHC -1.63%) it pays a large dividend yielding about 4.8% today. And it wasn’t long ago that the popular food company cut its payout to bring it down to a more manageable level.

With the company recently reporting earnings numbers that aren’t too impressive, another dividend cut may be on the way, or is this more certain dividend shares than it seems

Are Kraft’s earnings strong enough to support its current dividend rate?

In the last 12 months, Kraft generated sales of $26.1 billion, but it is profit margin this was fairly easy, with net income totaling just $1.4 billion. Most recently, the company posted a net loss of $290 million for the period ended Sept. 28, which was largely due to impairment losses related to goodwill and intangible assets — these totaled more than 1.4 billions of dollars.

The company’s diluted earnings per share for the last four quarters is $1.11, Less than the $1.60 paid in dividends per share over a full year. That puts payment report to over 144%.

Based on such a high payout ratio, you might assume that the dividend is unsustainable and that another cut might be possible (the company cut its dividend in 2019).

But this is a good example of one of the key limitations of the payout ratio, which is that a bad quarter can have a significant impact on the multiple, as any negative effect on earnings can make the dividend seem unsustainable. Although the company posted a loss last quarter from the non-cash impairment charge, it may not accurately reflect its ability to continue paying the current dividend.

Another way for investors to evaluate the safety of Kraft’s dividend

Instead of relying on earnings, investors can use free cash flow (FCF) to help determine if the company’s dividend is manageable. As this only involves cash flow analysis, it will exclude the effect of non-cash expenses such as depreciation.

Last quarter, FCF totaled $849 million, and in the last 12 months the company generated more than $3 billion. Over the course of a full year, Kraft pays out less than $2 billion in cash dividends, suggesting that the dividend is indeed safe based on its FCF.

Kraft announced its quarterly dividend payment of $0.40 on Oct. 30, the same day the company released its latest earnings results, so it doesn’t appear to be worried — at least not yet — about the ability to maintain the current dividend.

Is Kraft a safe dividend stock to own?

The company’s dividend is safer than it looks because the business generates enough FCF to continue making regular payments. And there may even be room to justify an increase in the future — but that’s by no means a guarantee. Overall, if you’re looking for a good dividend stock, Kraft Heinz can be a great option to add to your portfolio.