This Top Warren Buffett Dividend Stock Is Trading at a 5-Year Low. Time to Buy?

Globe and Mail

6 hours ago

As arguably the greatest investor of all time, Warren Buffett has made relatively few mistakes in his decades of investing. But Kraft Heinz (NASDAQ: KHC) was one of them. According to Buffett, Heinz overpaid for Kraft in 2015, which was a deal that Buffett's Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) was involved with and mistakenly promoted.
Kraft Heinz stock has lost two-thirds of its value over the last decade and now sits at five-year lows. However, Berkshire Hathaway continues to own about 27% of the company. This equates to about 3% of the value of Berkshire's stock portfolio, meaning it's still a top Buffett stock in spite of its poor performance.
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Buffett wishes he had paid a more attractive price for his stake in Kraft Heinz. But that's not the same as saying he wishes he had never invested in it. In other words, he doesn't necessarily regret owning a stake in the business, as evidenced by the fact that Berkshire continues to hold.
The interesting thing here is that Warren Buffett loves dividend-paying stocks, and the dividend for Kraft Heinz looks particularly attractive today. This is measured with the dividend yield, a metric that refers to how much an investor is paid per the value of their investment. An average dividend yield is somewhere around 2%. In comparison, Kraft Heinz has a much higher dividend yield of about 6%.
KHC Dividend Yield data by YCharts.
As the chart shows, Kraft Heinz usually has a high-yield dividend, but the payout is also currently elevated compared to its 10-year average. Investors who buy today could consequently be rewarded with good dividend income. And if the company raises its dividend in coming years, it would only get better.
That said, when a dividend yield gets as high as Kraft Heinz's, it usually means that investors believe its dividend isn't safe. That's the question for investors today: Is Kraft Heinz's dividend safe, making its yield attractive today? Or is its currently attractive yield merely luring investors into a trap?
What's going wrong for Kraft Heinz
Kraft Heinz owns a portfolio of well-known consumer brands, including eight billion-dollar brands such as Kraft Macaroni & Cheese, Heinz Tomato Ketchup, Velveeta, and Lunchables. Unfortunately, many of its brands have declining sales, particularly in key North American markets. This is the beginning of its problems.
One might argue that Kraft Heinz is caught in the middle. Among brand names, social media influencers hold more sway than ever, and many are launching their own branded packaged-goods products that have an immediate fan base. And people who are more price-conscious are willing to trade down to cheaper unbranded products.
With heightened competition in the branded space, sales for Kraft Heinz's products are challenged. So the company is trying to compete better on price. But this means that profits are falling by a larger amount.
Take its latest quarter as an example. For the first quarter of 2025, Kraft Heinz's organic net sales fell by nearly 5% year over year. But its operating income fell by 8%. When thinking about the safety of the dividend, this is a problematic trend if it continues.
The (modest) upside for Kraft Heinz
Kraft Heinz is looking to make "strategic transactions," which could include selling off something in its portfolio or buying another business. That said, I think shareholders should tap the brakes before getting too excited. The company has incredibly large debt load of nearly $21 billion. This potentially limits how big a buyout it could pursue.
Moreover, Kraft Heinz would need to sell a big, important brand to make a dent in its debt. But it would ideally keep the best brands for itself.
Apart from strategic transactions, I believe that Kraft Heinz's shareholders should hope for stability. The business likely won't grow much -- people only eat so much food. But maintaining would still be good, because it usually has a stellar operating margin of around 20%.
KHC Operating Margin (TTM) data by YCharts.
Kraft Heinz can further improve its business by reducing some operating expenses. Management believes it can reduce costs by about $1 billion between now and the end of 2027, which would be helpful in sustaining the dividend.
For investors looking for top-line growth or even dividend growth, Kraft Heinz stock might not be the best option right now. Moreover, some trends in the business are negative and could affect the dividend if they continue, which is something to keep in mind.
That said, my outlook for Kraft Heinz is much more hopeful. Sales have only dropped modestly, and the business is still strong, as evidenced by its profit margins. Therefore, I'm inclined to say that the dividend is safe and could be attractive for investors who are purely looking for income.
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