Because of growth fears, Kraft-Heinz (NASDAQ: KHC) shares moved to the low end of a long-term, multi-year trading range in early 2025. The growth fears center on consumer shifts, with higher-priced brands like Kraft in danger of losing market share. However, despite the risks, the stock price is unlikely to fall to new lows because the institutions have signaled a bottom. The institutional buying was ramping higher in the 2nd half of 2024 as they bought into the sell-off but reached a crescendo in Q1 2025 that has the market in a full-blown rebound.
Institutional selling also ramped higher in Q1 but was offset by buying volume, which netted shares equal to 1% of the market cap in late February. This is a significant tailwind for the market because the institutions own about 80% of the stock, including a sizeable holding by Berkshire Hathaway. Berkshire Hathaway isn’t included in the 2024/2025 buyers but is a significant holder at 27% of the shares, and it isn’t selling. The high yield and outlook for an eventual price-multiple expansion are among the reasons for the institutional interest.
Institutions Buy Value: Invest in Kraft-Heinz's Improving Capital Return Outlook
Kraft-Heinz presents one of the best values and yields among consumer staples when trading at the low end of its range. The stock is valued at only 11x current year earnings and pays nearly double compared to other high-quality dividends in the sector. Hormel trades at 18x its earnings, and Clorox, which is well-represented in the flavorings and condiments categories, trades at 21x. Hershey, which pays a higher percentage of its earnings as dividends, traded nearly 30x its earnings in late February but yields less than 3.5% compared to KHC’s 5%.
One of the reasons for the value discrepancy is dividend growth. Kraft-Heinz pays a reliable dividend but hasn’t made a dividend distribution increase in years, while the others are known to increase theirs annually. However, a dividend increase remains in the outlook for KHC shareholders and is a catalyst that can unlock a price-multiple expansion. Regarding the timing of a future distribution increase, the company’s business repositioning efforts and balance sheet improvements have reduced the payout ratio to the low 50% range, improving capacity for increases that may come once business traction is regained.
Highlights from F2024 include a wider margin despite modestly lower revenue. Gross and operating margins were improved, driving a 2.7% increase in adjusted income and providing sufficient cash flow to buy back shares while investing in the business and maintaining balance sheet health. Buybacks are significant for two reasons, including the 2% average reduction in quarterly share count and an indication of financial health. Kraft Heinz had suspended its buybacks but resumed them in 2024 as its financial condition improved. Coincidentally, balance sheet and capital return improvement are details that pertain to Berkshire Hathaway’s investment in Occidental Petroleum (NYSE: OXY).
KHC’s 2025 Outlook Hinges on Signs of Business Improvement
Analyst sentiment for KHC stock took a turn for the worse following the Q4 2024 earnings report and will likely weigh on the share price until signs of business traction are seen in the results. The activity includes several downgrades and price target reductions that put this stock in the low-end range of targets; consensus says it is fairly valued when trading near $31.50.
The price action in KHC is favorable, showing a clear bottom at the critical support target compounded by elevated volume. The bottom is near $28.50 and is unlikely to be broken unless the institutions revert to selling. However, the upside may also be limited until a catalyst for buying emerges. The price action shows signs of resistance at the 150-day EMA that could cap gains for the foreseeable future.
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