Motley Fool: Investors may like the flavor of Kraft Heinz

Kraft Heinz (Nasdaq: KHC) is a profitable business that benefits from owning several top brands, including Capri Sun, Jell-O, Maxwell House, Oscar Mayer, Smart Ones, Velveeta, and its namesake Kraft and Heinz brands.

Warren Buffett’s Berkshire Hathaway owns 27% of the shares outstanding, which puts shareholders in good company.

Sales have been weak lately, with many customers opting for less expensive items. But Kraft Heinz still generated $2.9 billion of free cash flow from over $26 billion in sales over the past year.

Kraft should return to growth, as it was reporting solid single-digit sales growth last year, and management expects a gradual improvement in the second half of the year. Plus, it’s innovating in new products.

Kraft Heinz’s dividend recently yielded a solid 4.7%.

The company cut its dividend back in 2019 to strengthen its finances. But the steady sales from its strong brands and improved free cash flow should keep the dividend safe from further cuts.

Moreover, the stock trades at an inexpensive forward-looking price-to-earnings (P/E) ratio of 11.2, below its five-year average of 13.

As Kraft pays down debt and returns to growth, the stock could offer an upside that, combined with a high yield, could lead to handsome returns in the coming years. (The Motley Fool recommends Kraft Heinz.)

Ask the Fool

Q: Should a company’s forward price-to-earnings (P/E) ratio be higher or lower than its current P/E ratio? – S.B., Worcester, Massachusetts

A: Lower is typically better. A company’s current P/E ratio is its current stock price divided by its earnings per share (EPS) for the trailing 12 months – so it’s backward-looking. The forward P/E ratio, in contrast, divides the stock price by next year’s estimated EPS.

A forward P/E ratio lower than the current P/E ratio reflects earnings that are expected to rise.

Imagine, for example, that Buzzy’s Broccoli Beer (ticker: BRRRP) is trading at $100 per share with EPS over the past year of $4. Its P/E would be 100 divided by 4, or 25. If it’s expected to generate $5 in EPS next year, its forward P/E would be 100 divided by 5, or 20.

Of course, a lower forward P/E might just be due to unusually low earnings in the past year. And earnings estimates can turn out to be wrong. Never base any investment decision on only one measure, or even just a few.

Q: What does a company’s chief financial officer actually do? – K.N., Chandler, Arizona

A: A chief financial officer (CFO) – such as Microsoft’s Amy Hood, Merck’s Caroline Litchfield or ExxonMobil’s Kathryn Mikells – is a top executive who manages the company’s finances.

They determine the company’s current and future financial needs and plan how to most effectively meet them, handling relationships with banks and other funders. The CFO sets the company’s “capital structure” – its mix of debt, stock and internal financing.

And among other responsibilities, they oversee financial reporting, budgeting (which includes cash flow), tax issues and forecasting.

My Smartest Investment

My smartest investment move was holding onto my Lockheed (later Lockheed Martin) stock after working there from 1986 to 1999. I amassed some 800 shares and still have quite a bit today. – J.D., Corralitos, California

The Fool responds: Holding on to shares of companies that are growing is often a very smart move indeed.

Lockheed Martin’s stock was recently up in value by 1,579% since the beginning of 1999, and that figure soars to 2,538% if you reinvested dividends. (Reinvesting dividends into additional shares of stock can be a powerful move.)

That’s average annual growth of 11.6% and 13.6%, respectively – well ahead of the corresponding respective returns for the S&P 500 index of 6.65% and 7.9%.

It’s worth noting that if these shares were a big portion of your portfolio while you worked at Lockheed, you were exposing yourself to meaningful risk.

After all, your income was dependent on Lockheed, and much of your retirement nest egg would have been, too.

Had the company hit a major rough patch, you might have lost your job and also taken a big hit in your portfolio at the same time. Investing in your employer can work out well, but it’s best to not overdo it.