Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Is Kraft Heinz Junk?

Food icon and Buffett favorite, the Kraft Heinz Co. (NASDAQ: KHC) is officially a junk stock. To explain, Standard & Poor’s (S&P) downgraded Kraft Heinz’s bonds to junk status or BB+, Yahoo! Finance reports.

To elaborate, S&P regards a BB+-rated bond as a speculative investment. The press; however, brands BB+ rated debt as “junk bonds. “A BB+ rating means Kraft Heinz will pay more to borrow money.

A BB+ rating could be expensive for Kraft Heinz because it had $28.216 billion in long-term debt and $1.028 billion in short-term debt on 31 December 2019. However, Kraft Heinz could still be a value investment because Stockrow estimates it had $101.45 billion in total assets on New Year’s Eve 2019.

Is Kraft Heinz a Value Investment?

Strangely, the BB+ rating and a stock price of $26.03 on 6 March 2020 could make Kraft Heinz (NASDAQ: KHC) a value investment.

I think Kraft Heinz is a potential value because it reported making gross profit of $2.017 billion on revenues of $6.536 billion for the quarter ending on 31 December 2019. In addition, Kraft Heinz reported a quarterly operating income of $594 million and a common net income of $182 million for the same period.

Moreover, Kraft Heinz still runs a lot of cash through its till. In fact, Kraft Heinz reported a quarterly operating cash flow of $1.562 billion, a quarterly investing cash flow of $400 million on 31 December 2019. However, Kraft Heinz reported an ending cash flow of -$36 million on the same day.

Therefore, Kraft Heinz generates a lot of cash. Unfortunately, Kraft Heinz spends a lot of that cash on debt repayment.

Can Warren Buffett save Kraft Heinz?

The trick at Kraft Heinz is to separate the value from the debt. That could be a trick even Warren Buffett finds impossible.

Berkshire Hathaway (NYSE: BRK.B) owns 27% of Kraft Heinz, Business Insider reports. Business Insider claims Buffett lost over $1 billion when Kraft Heinz’s share price fell in February 2020. The stock collapsed after Kraft Heinz admitted its sales fell by 5% in 4th Quarter 2019.

Importantly, there is a way Buffett can get all of Kraft Heinz’s value. I think Berkshire Hathaway (NYSE: BRK.A) could buy the rest Kraft Heinz outright and make it a full subsidiary.

That could erase or lessen Kraft Heinz’s debts if Kraft Heinz declares bankruptcy first. Or Buffett could buy Kraft Heinz’s debts, and make money from the interest. Either way, Uncle Warren could make a lot of money from Kraft Heinz.

Also, the media speculates that Buffett is seeking a large acquisition. Why not, Kraft Heinz, a company Berkshire is familiar with and owns part of.

Why Warren Buffett could Want Kraft Heinz

Buffett could want Kraft Heinz for all the global brands the food maker owns. Kraft Heinz’s stable of brands includes: Heinz Ketchup, Kraft Cheese, Kraft, Macaroni and Cheese, Jell-O, Grey Poupon mustard, Maxwell House coffee, Planter’s Peanuts, Kool-Aid, Classico, Velveeta, Honing, Capri Sun, and Weight Watchers.

Berkshire Hathaway could distribute all or some of those brands through its McLane subsidiary. McLane distributes food, snacks, candy, cigarettes, and other items to stores and restaurants.

One way Berkshire could make more money is to have McLane distribute Kraft Heinz food products to delivery services such as Instacart or Amazon Fresh. Instacart or Amazon could deliver those foods straight to customers’ homes.

Another way Berkshire could make money is to distribute Kraft Heinz products to all the cashier-less automated stores Amazon (NASDAQ: AMZN), Walmart (NYSE: WMT), and other retailers plan to open.

Beyond McLane, Berkshire could sell Kraft Heinz foods straight to Amazon or Kroger’s (NYSE: KR) robotic grocery fulfillment system. However, Berkshire will have to sell Kraft Heinz products at a low price to make money from Amazon or Kroger. To explain, Kroger and Amazon are deep discounters that make money by selling vast amounts of goods at a low price.

Is Kraft Heinz a Good Dividend Stock?

Oddly, I consider Kraft Heinz (NASDAQ: KHC) a good dividend stock because it will pay a 40₵ dividend on 12 March 2020 despite its problems.

Overall, estimates Kraft Heinz delivered a 6% dividend yield, an annualized payout of $1.60, and a payout ratio of 70.34% on 6 March 2020. Moreover, Kraft Heinz dividends have grown for the last five years despite the company’s problems.

Thus, investors could still make money from Kraft Heinz. However, I think S&P is right about Kraft Heinz’s. To explain, I consider Kraft Heinz a risky speculative investment with a low margin of safety, that only investors who can afford to lose money should buy.