I think Kraft Heinz (NASDAQ:KHC) is a high-quality value stock. It’s one of the largest investments in Warren Buffett’s stock portfolio and I’m looking to buy it at today’s prices.
At $34 per share, the stock is down by around 16% since the start of the year and is close to its 52-week low of $32.73. With a dividend yield over 4.5%, this looks like an opportunity to me.
Stagnation
At first sight, the company’s performance over the last five years doesn’t have much to get investors excited. Revenues growth, in particular, has been pretty modest over the last few years.
On top of that, the company hasn’t increased its dividend on a per-share basis since 2019. Add in an absence of share buybacks and it’s easy to think this isn’t a stock to buy.
All of this is true. And in an inflationary environment, there’s a risk that inflation could continue to weigh on operating margins for the business going forward.
Despite this, though, I think this looks like a stock to buy. As I see it, there are some important features that are overlooked by focusinig on the pessimistic headline news.
A quality business
First and foremost, Buffett looks to invest in quality businesses. These are ones that have some sort of advantage over competitors and Kraft Heinz fits the bill here in two ways.
The company’s strong brands and huge scale give it a competitive edge. This allows the business to charge higher prices and sell bigger volumes, while also keeping control of its own costs.
This shows up in the company’s financials. Buffett says the best investments are ones that can generate a lot of cash relative to their costs.
In this regard, Kraft Heinz clearly fares pretty well. The company generates $4.5bn in operating income using $6.7bn in fixed assets – a return of around 67% per year.
A bargain price
According to Buffett, finding a great business is important, but so is buying shares at the right price. In other words, it’s possible to overpay even for a quality company.
But after a year or so of steady price declines, I don’t think investors buying shares in Kraft Heinz stock today are in much danger of overpaying. To me, the stock looks cheap.
It looks like the business hasn’t been making any progress over the last few years, but this isn’t quite true. The company has been reducing its debt pile from $27bn in 2019 to $19bn now.
The result is a business that should be fairly consistent even in difficult times. It’s unlikely to achieve huge revenue growth going forward, but I think this is reflected in the current price.
A stock to buy
I already own Kraft Heinz shares in my portfolio. Going forward, I see the company as one that can provide me with long-term passive income through good times and bad.
With the share price close to its 52-week lows, I think there’s a good opportunity here. That’s why I’m looking to buy the stock myself right now.
