Buffett was one of 60 investment firms in Insider Monkey’s database which were long Kraft Heinz on March 31. Those investors held $28.64 billion of the company’s shares, headlined by Buffett’s massive $25.58 billion position. Only Wells Fargo, which Buffett also has a massive position in, had more money invested in it among the 766 active funds tracked by Insider Monkey. Bruce Covner’s Caxton Associates, D E Shaw, founded by David E. Shaw, and Daniel Och’s OZ Management also have large positions in Kraft Heinz.
The company maintains a wonderful portfolio of brands, sells recession-resistant products, generates dependable free cash flow, and is taking steps to further bolster its margins and earnings.
These are many of the qualities I like to see for companies included in our Top 20 Dividend Stocks portfolio, so let’s see if Kraft Heinz can make the cut.
Kraft Heinz is the fifth largest food and beverage company in the world. The company was formed in 2015 after Kraft Foods Group and H.J. Heinz merged together.
Heinz specialized in ketchup, sauces, meals, soups, snacks, and infant nutrition. Kraft Foods was one of the largest consumer packaged food and beverage companies in the country.
Kraft Heinz owns more than 200 brands that are sold in close to 200 countries. Some of its well-known brands include Kraft, Heinz, Oscar Mayer, Ore Ida, Velveeta, Capri Sun, Planters, Jell-O, Kool-Aid, Lunchables, Philadelphia, and Kraft Macaroni and Cheese.
Condiments and sauces accounted for 32% of the company’s sales in fiscal year 2016, followed by cheese and dairy (15%), frozen and chilled meals (12%), ambient meals (10%), and infant and nutrition products (5%). Wal-Mart is the biggest customer at 20% of revenue.
By geography, Kraft Heinz derives approximately 76% of its revenue from North America, 10% from Europe, 7% from Asia Pacific, 3% from Latin America, and 4% from other countries and exports.
The merger of Kraft and Heinz brought together two companies with complementary strengths and iconic brands.
Prior to the combination, Kraft was the fourth largest North American food and beverage company and maintained number one or number two market share positions in 17 core product categories, representing approximately 80% of the company’s total sales.
Impressively, Kraft’s products average twice the market share level of their nearest branded competitors.
Kraft’s products were in 98% of North American households (an average of 10 Kraft brands per household), and the company reported 80% consumer awareness of the Kraft brand in 14 key international markets.
Heinz was more international with 60% of sales outside of North America and generated 25% of its sales in emerging markets. The business focused more on ketchup, sauces, meals, and snacks.
Heinz had products that maintained the number one or number two market share position in more than 50 countries. It was also the most profitable food company in the industry.
By combining forces (Heinz was doing $10 billion in sales and Kraft’s annual turnover was $18 billion), Kraft and Heinz gained substantial scale in North American retail and foodservice markets.
As a result, management identified cost synergies of approximately $1.5 billion, driven by opportunities to rationalize manufacturing footprints, consolidate distribution, reduce headcount, and optimize marketing. The company expects to achieve these synergies by 2017.
Heinz’s CEO Bernardo Hees now runs Kraft Heinz and was instrumental in helping Heinz improve its margins to lead the industry over the last few years.
He can now put some of his profit-improving strategies in place at Kraft to lift overall margins of the combined company – even if overall sales remain stagnant.