After an inspirational discussion with Lanny over the weekend, I was looking to come out of the gates firing on Monday. I was excited for the opportunity to add to my portfolio. “firing out of the gates” may not be the best way to describe this purchase. Overall, it wasn’t the largest. But I was excited for the chance to add some nice income and continue to build a position in my portfolio . Here is why I added to my position in Kraft Heinz (KHC)!
Why Kraft? Why Now?
My last three purchases have been made to build positions that I already owned. Thanks to my brokerage transfer, I have free stock purchases for a three-month period. These free purchases have allowed me to add small amounts of capital to certain positions that I haven’t considered “full.” AKA, I would love to add to this position at some point and build a larger one.
KHC has always been one of those positions for me. It was actually one of my first dividend growth stock purchases way back in the day. I purchased Kraft prior to the merger with Heinz and post-the initial spin-off. After my first purchase, the stock-price shot off like a cannon and I was kicking myself for not buying more at the time. I love consumer staple stocks and KHC has some of the best brands out there. Their brands include Kraft, Heinz, Oscar Meyer, Jello, Maxwell House, Valveeta, Smart Ones, Capri Sun, and so on! After years of watching the price sky-rocket, I was excited to get a chance to purchase the company at a lower valuation, potentially. That is a great segue into our next section!
Dividend Diplomats Stock Screener – KHC
With every purchase, we run the company through the infamous Dividend Diplomats Stock Screener. This is our simple stock screener that helps us identify potentially undervalued dividend growth stocks. For this analysis, we used my purchase price of $57.93/share and an average forward EPS of $3.71 (per Yahoo Finance. Here we go!
- P/E Ratio – Using the figures above, I calculated a P/E Ratio of 15.6X. This is well below the S&P 500 value, which is in the low 20X range. Pass!
- Payout Ratio less than 60% – KHC’s annual dividend rate is $2.50/share. Thus, I calculated a dividend payout ratio of 67%. For our screener, we start with a 60% threshold as we believe this allows a company to continue to grow their dividend going forward. A significant higher ratio (between 90%-100%), would indicate that a company is paying out nearly all of their earnings. Barring some exceptions based on industry standards, this typically isn’t sustainable. And consumer products are not in the “exception” category for industries. Am I concerned that their payout ratio is slightly above our stock screener? Not really. 67% isn’t causing me to lose sleep over night. However, I will monitor this going forward to make sure the ratio doesn’t creep too much higher.
- History of Increase Dividends – Now here is the tricky one. The company has increased their dividend every year since the initial Kraft spin-off. Prior to spin-off, the company was a dividend paying company. After, the company is as well. Heck, Kraft has Warren Buffet on the sidelines. That should be music to a dividend growth investor’s ears. However, the company did not announce a dividend increase in August as expected. Now, KHC has gone five quarters since their last dividend increase and this has caused investors to pause. There is a lot of speculation about why they dividend not increase their dividend (i.e. holding cash for an acquisition). But at the moment, speculation is all that it is. Overall, there could be more to the picture and I’ll definitely be concerned if the company continues to maintain their dividend rather than increase it. If they don’t announce an increase by February, we may have a different discussion. However, I’m not concerned for a few reasons. I like the company’s yield and the company has increased their dividend in recent past. Even if that recent path was not in August. Lastly, I’m not talking about a large purchase here. Rather, I am adding a small amount to a current position.
- Dividend Yield – Last, but not least, I reviewed the company’s dividend yield. Currently, KHC is yielding 4.3%. This is above my portfolio’s average dividend yield. It is always a plus in my book.
The purchase – KHC
After the screener, I was comfortable adding to my position in KHC. I added 10 shares of KHC at $57.93/share, totaling $579.30 since I had a free trade. This purchase added $25 in annual dividend income to my portfolio! Now, I own 50.425 shares, which produces $126.06 in forward dividend income. My position is closing in on $3k in market value. However, I don’t consider this a “full” position by any stretch of the means. If the price continues to decline, I may have to continue building this position!
What are your thoughts about my purchase? Are you a fan of KHC at the moment? Or are you concerned about their dividend growth? Do you think they will announce a dividend increase in November?