High-Yielding Dividend Stocks: Separating Fact from Fiction
When it comes to investing, high-yielding dividend stocks can be a tantalizing option. After all, who wouldn’t want a steady stream of recurring income and boosted overall returns? However, it’s essential to approach these investments with a critical eye, especially when yields reach around 5%. The last thing you want is to buy a stock for its dividend, only to see the payout slashed in the near future.
Kraft Heinz: A Case Study
Take Kraft Heinz (NASDAQ: KHC), for example. This popular food company boasts a dividend yield of around 4.8% today. But it wasn’t long ago that Kraft Heinz cut its payout to bring it down to a more manageable level. With the company recently reporting underwhelming earnings numbers, it’s natural to wonder if another dividend cut might be on the horizon.
A Closer Look at Kraft Heinz’s Finances
In the trailing 12 months, Kraft Heinz generated $26.1 billion in sales, but its profit margin was relatively slim, with net income totaling just $1.4 billion. The company’s most recent quarterly report showed a net loss of $290 million, largely due to impairment losses related to goodwill and intangible assets. This has led to a diluted earnings per share of $1.11 over the past four quarters, less than the $1.60 it pays out in dividends per share annually. This puts its payout ratio at a concerning 144%.
The Limitations of Payout Ratio
However, this high payout ratio doesn’t necessarily mean the dividend is unsustainable. The payout ratio can be skewed by one bad quarter, making the dividend appear precarious. A more accurate gauge of a company’s ability to pay its dividend is free cash flow (FCF). By focusing on cash flow alone, investors can exclude the impact of noncash charges like impairment.
Kraft Heinz’s Free Cash Flow: A More Positive Picture
Last quarter, Kraft Heinz’s FCF totaled $849 million, and over the past 12 months, the company has generated more than $3 billion. With annual cash dividend payments of less than $2 billion, it appears that the dividend is indeed safe based on its FCF. The company’s announcement of its $0.40 quarterly dividend payment on October 30 suggests that it’s confident in its ability to maintain the current dividend.
A Safer Dividend Stock Than It Seems
While Kraft Heinz’s dividend may seem precarious at first glance, a closer examination of its FCF reveals a more positive picture. The company’s dividend is safer than it appears, and there may even be room for a future increase. If you’re looking for a reliable dividend stock to add to your portfolio, Kraft Heinz is certainly worth considering.
Expert Insights
Before investing in Kraft Heinz, consider the expert analysis from The Motley Fool’s Stock Advisor team. They’ve identified what they believe are the top 10 stocks for investors to buy now – and Kraft Heinz didn’t make the cut. These 10 stocks have the potential to produce exceptional returns in the coming years. Learn more about Stock Advisor and discover the 10 stocks that made the list.
Leave a Reply