Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) holds many prominent household names in its portfolio. But not all of them have been doing well in recent years. A great example of that is Kraft Heinz (NASDAQ: KHC). Despite being a big name in the food industry, it has been a brutal investment to hold — its shares are down 17% over the past five years.
The business isn’t doing well, growth is stagnant, and investors are worried about the future as consumers pivot to healthier food choices. And the company is reportedly considering a breakup of its business. Here’s why that could be a good thing for investors.
Image source: Getty Images.
According to The Wall Street Journal, Kraft is looking at spinning off a sizable chunk of its business, which would be worth around $20 billion. Currently, the stock’s total market cap is approximately $34 billion. While the details are still not exactly known as to which brands might be in which business, the company is reportedly looking to have one business that focuses on spreads and sauces, while the other is likely to include processed meats, cheeses, and other core products.
It could take weeks before details are sorted out and there’s also the possibility that a breakup doesn’t end up happening. But with the stock and company performing so poorly in recent years, a shake-up could be in order. The company’s sauces and spreads, for instance, which are staples in households around the world, may have better growth potential than a business that’s focused on processed food, which has been associated with health risks.
Kraft’s top line hasn’t given investors much reason to be optimistic. While it’s been relatively steady in recent years, at around $26 billion in annual revenue, that’s not terribly exciting for growth investors, especially given that many of the company’s brands are synonymous with less-than-healthy eating.
KHC Revenue (Annual) data by YCharts
Forward-looking investors know that this downward trend may persist in the future as consumers eat healthier. And while the stock offers a high dividend yield of 5.5% today, that may not be enough of a reason to own it, especially if the stock’s losses more than offset the dividend income. Plus, the danger is that if the company’s top and bottom lines decline in the future, the dividend may not prove to be sustainable.
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For both dividend and growth investors, there are plenty of concerns around Kraft these days, which explain why the food stock hasn’t been doing well.
Kraft’s stock looks cheap, trading at 13 times its trailing earnings. But with many question marks around its business, the safest option is to take a wait-and-see approach. A spinoff could open up a good opportunity for investors, by splitting off segments and brands that may have more potential to grow in the long run.
However, until the full details come out about a spinoff and what brands each business may have, it would be difficult to assess just how attractive the opportunity might be. And you would still need to wait until after the spinoff takes place and then invest in the specific business you want, to ensure you aren’t still having a position in the entire company as it stands today.
For now, I’d hold off on buying Kraft’s stock. It appears evident that a change in strategy may be inevitable, whether it’s a breakup of the business or some other move, and you may be better off waiting before making any investment decision on Kraft.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
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