Buying what you know can be a great investment strategy, especially when it comes to business models that are easy to understand. As Warren Buffett once put it, “if you can’t explain it to a six-year-old, then you don’t understand it yourself.”

Perhaps some of the most easy-to-understand companies out there are those in consumer staples, and The Kraft Heinz Company (NASDAQ:KHC) may be the poster child of recognizable household brands that households are familiar with.

In this article, I revisit KHC and discuss what makes why this 5%-yielding dividend stock is so appealing while it is trading near its 52-week low, so let's get started!

Why KHC?

Kraft Heinz is home to a host of familiar brands, including its 2 namesakes for condiments that are popular during the summer. KHC also extends well beyond the U.S. with a presence in 190 countries.

I last covered KHC back in January, highlighting its progress with turnaround efforts and product innovation along with bottom-line growth. The stock continues to be out of favor with the market, however, as the stock has fallen by 14% since my last piece. As shown below, KHC currently trades near its 52-week low of $30.68 and is down by 10% over the past 12 months.

One of the reasons for why KHC is down may be due to negative market sentiment toward its slow-growth nature compared in this tech-heavy market. This is reflected by KHC’s 0.5% decline in organic net sales during Q1 2024 as lower income consumers continue to be challenged by inflation, including higher gas prices and lower savings, resulting in cutbacks at restaurants and convenience stores.

Despite these challenges, KHC has been able to manage through its own input cost inflation of 3% through supply chain efficiencies, while passing just 1% in price increases to consumers. The aforementioned efficiencies enabled KHC to achieve 170 basis points growth in adjusted gross profit margin, as well as 1.7% and 1.5% YoY growth in adjusted operating income and EPS, as shown below.

Management is guiding for mid-single digit organic revenue growth for the full year 2024, with the anticipation of a return to growth in Emerging Markets in the second half of this year, along with a focus on higher-margin channels like hospitality and travel that’s expected to yield results in the U.S. As shown below, operating income and EPS growth are expected to be 3% and 2% at the midpoint of range for this year.

This also includes new offerings like NotCo Mac & Cheese, which is made from plant-based ingredients, and Zero Sugar Heinz Ketchup, which is sweetened only by plants. KHC was recently recognized as a #26 Most Innovative Company by Fast Company, and this includes its Heinz Remi, an internet-connected sauce dispenser for restaurants that lets users mix and match up to 200 different combinations. Management recently stated that they are on track to generate $2 billion incremental net sales from innovative products.

Meanwhile, KHC maintains a sound balance sheet with a BBB investment grade credit rating from S&P and a safe net debt to EBITDA ratio of 3.0x, which is down from 3.1x in the prior year period.

This lends support to KHC’s 5% dividend yield. While dividend growth has been lacking in the years since it was cut in 2019, the safe payout ratio of 54% leaves potential for a future raise as the business turns around with innovative offerings, and gives KHC capacity to repurchase cheaply valued shares. KHC spent $150 million on share buybacks in Q1 alone, and as shown below, it’s reduced share count by 1.1% over the past 12 reported months.

Risks to KHC include competition for cheaper-priced private label brands in an increasingly cost-conscious environment among consumers. In addition, recent negative headlines around Lunchables. In April, Consumer Reports noted Lunchables as having higher levels of sodium and lead, but that was later corrected to it having only higher levels of sodium. Nonetheless, the damage to social media to the brand could hurt sales in Q2.

It does appear, however, that the headline risks are already priced into the stock at the current price of $32.21 with a forward P/E of just 10.6, sitting far below its historical P/E of 16.7, as shown below.

As shown below, KHC’s valuation also compares favorably to the sector median P/E of 17.3, helping it to earn a B+ grade on Valuation.

Sell side analysts who follow the company estimate 5-6% annual EPS growth in the 2025-2027 timeframe, which I believe to be reasonable considering the aforementioned growth drivers from innovative brands and supply chain efficiencies. With a 5% dividend yield and mid-single digit EPS growth, KHC could deliver market-level total returns, and a potential return to its mean valuation would be an additional growth kicker beyond that.

Investor Takeaway

Kraft Heinz remains an appealing investment due to its recognizable household brands, substantial dividend yield of 5%, and ongoing turnaround efforts, all while trading near its 52-week low price. While facing challenges from inflation and slow market growth, KHC has managed supply chain efficiencies and modest price increases, resulting in improved profit margins and earnings.

Innovative products and a strong presence in emerging markets are expected to drive future growth. Additionally, KHC's sound balance sheet, share buybacks, and attractive valuation compared to sector peers position it well for potential market-beating returns, all while paying a solid and well-covered dividend.