Key Points
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Kraft is selling a controlling stake in its coffee business.
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The move will generate net cash proceeds of $500 million that it will use to pay down debt.
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The company’s most recent financials showed a decline in earnings, as its payout ratio is fairly high.
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Dividend stocks can be great income-generating investments to own, but investors need to remember that their payouts are not guaranteed. Dividend cuts can and will happen if a company’s financial performance deteriorates to the point that it can no longer justify paying the dividend at its current rate.
Kraft Heinz (NYSE:KHC) previously cut its dividend in 2019, and while its payout has remained consistent since then, there may be trouble ahead, especially after the company recently announced plans to sell a key business unit. Here’s why investors should brace for the possibility of another reduction to its dividend in the not-too-distant future.
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Kraft is selling its coffee business
Last week, Kraft announced it would become leaner by divesting its North American coffee business, selling a majority stake to One Rock Capital Partners, LLC, while retaining a 30% position. Kraft expects to generate $500 million in net cash proceeds from the deal, which it is going to use to bring its debt load down.
Coffee is one of Kraft’s smaller categories that it generates revenue from. In its most recent quarter, which ended on Sept. 26, revenue from coffee products totaled $211 million, accounting for just over 3% of the company’s total net sales of $6.1 billion.
While it won’t put a big dent in the food company‘s revenue, the move suggests that the company’s finances are tight enough that it needs to divest a business unit. If the company is going to these lengths to pay down debt, it may indicate that the dividend isn’t safe and that, if things don’t improve, a dividend cut may be Kraft’s next move.
Investors shouldn’t be lured in by a high yield
Kraft’s stock has declined by 35% in five years. Thus, even without increasing its dividend, its overall yield has climbed due to its falling share price. At 6.5%, it offers a fairly high yield, which can be enticing for income-seeking investors.
However, the dividend doesn’t look all that safe because the company reported a diluted per-share profit of $0.46 last quarter, down from $0.52 a year ago and only modestly higher than its quarterly dividend of $0.40. There’s not a huge buffer there, and with Kraft selling a big chunk of its coffee business, that doesn’t inspire much confidence that things are getting better.
Kraft is a stock I’d stay away from, as there are many other quality dividend stocks to choose from instead.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
