Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Kraft Heinz has a Dividend Growth Score of 55, which suggests that its dividend growth potential is about average.
Kraft Heinz continued Kraft’s quarterly dividend payment of 55 cents per share following the merger in mid-2015.
Since then, management has raised the dividend by 4.5% to 57.5 cents per share and expects to continue growing the dividend over time.
Prior to being taken private in 2013, Heinz had increased its dividend for nearly 10 consecutive years and was on the verge on becoming a Dividend Achiever. Kraft has raised its dividend every year since 2013 but is a long ways away from joining the Dividend Aristocrats list.
From merger integration work to debt refinancing, there are a number of moving parts at the company right now.
As a result, I expect dividend growth to remain around 4% for the next year or two. Beyond that, I think Kraft Heinz can continue growing its dividend at a mid-single digit clip (e.g. 4-6% per year).
Valuation
Shares of Kraft Heinz Co (NASDAQ:KHC) trade at a forward-looking P/E ratio of 27.5, which appears expensive.
However, given the amount of merger integration work and debt refinancing in the works, it’s worth looking further ahead to 2017. Using consensus earnings estimates, Kraft Heinz trades at a 2017 P/E ratio of 22.1.
Pairing the stock’s relatively high valuation multiples with its 16% price surge year-to-date, it’s hard to make a compelling argument that the stock is at an attractive entry point today.
Over the long term, it seems reasonable that Kraft Heinz can generate earnings growth of 4-6% per year. Demand for its products should follow population growth, and the company has some operating leverage in its model to increase earnings somewhat faster than sales.
Under my assumptions, the company appears to offer total annual return potential of 7-10% per year (2.7% dividend yield plus 4-6% annual earnings growth).
Conclusion
Many of Warren Buffett’s holdings are characterized by strong brands, essential products, and dominant market share positions, so it’s no surprise why he was excited to own Heinz and Kraft.
While the stock doesn’t appear to be offering much value today, the underlying business will likely remain a dominant force in the food and beverage industry for many years to come.
Until the company’s valuation comes back down, I will continue monitoring it along with some of my other favorite blue chip dividend stocks.
Disclosure: None
