Why Warren Buffett loves this US stock

This stock buy hasn't worked out as Buffett expected, but investors can still learn some important lessons.

| More on:
berkshire hathaway owner warren buffett

Image source: Getty Image Source

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

A five-year chart of The Kraft Heinz (NASDAQ: KHC) stock offers a near-perfect reversed reflection of the S&P 500 index's performance over the same time frame. Share prices of the food product giant have declined nearly 57% over the last five years, underperforming the 46% gain from the index. But Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK.A)(NYSE: BRK.B) has held to its shares in the company throughout that half-decade.

Berkshire is one of the company's largest shareholders. As of March 2022, Berkshire owned 26.6% of Kraft Heinz. 

Why has Buffett continued to hold an underperforming stock? Well, for one thing, it's not like there haven't been any good reasons to sell. Here are a few things that went wrong following the merger between Kraft Foods and H.J. Heinz:

  • Kraft saw its market share erode against the growth of private-label brands, leading to a decline in sales.
  • In 2018, the company disclosed an SEC investigation into its accounting policies over supplier agreements.
  • Kraft also cut its quarterly dividend to address more than $30 billion of long-term debt it held as of 2018. 

Most investors would have sold Kraft Heinz long ago, but not Buffett. In early 2019, Buffett told CNBC he would be happy to own the stock 10 years from now. 

Buffett has cut loose several stocks over the past several years that failed to perform to his expectations. He closed Berkshire's position in IBM in 2017, after he bought $10.8 billion worth of shares in the computer hardware maker in 2011. But there is clearly something about Kraft Heinz that he values. Let's look at three possible reasons why he has remained patient with this one.

1. Buffett likes to do business with people he trusts

Buffett admitted in 2019 he misjudged the competitive position of packaged food brands against Wal-mart Stores, Inc. (NYSE: WMT) and other retailers' efforts to promote their own private labels. That was a big reason why Kraft saw its sales and profits decline through 2019. 

However, Buffett went into the Kraft Heinz merger in 2015 with a valued partner. Berkshire and 3G Capital own a combined 42% of Kraft Heinz. Buffett has been friends with 3G founder Jorge Paulo Lemann for many years. He first met Lemann while serving on the board at Gillette before it was acquired by Procter & Gamble

3G Capital has a long record of doing deals across industries and improving performance at the businesses it controls. The Brazilian investment firm famously orchestrated the combination of Anheuser-Busch Inbev in 2008. Buffett has always believed in doing business with people you trust, and that certainly applies to his investment in Kraft Heinz.

2. Kraft has "very, very strong brands"

While certain Kraft brands, such as Oscar Mayer, Jell-O, and CapriSun, no longer have the competitive edges they did many years ago, brands like H.J. Heinz, Kraft Mac & Cheese, Lunchables, and Philadelphia cream cheese still generate strong sales. Buffett has called these "very, very strong brands." 

Indeed, these products have remained immune to the pull of private labels. Over the last three years, they delivered annualized growth in adjusted sales of 8%. 

3. Sales are growing under Kraft Heinz's new CEO

To turn things around starting, Kraft Heinz turned to 3G's farm team. In 2019, Kraft appoint former Anheuser-Busch Inbev's Chief Marketing Officer, Miguel Patricio, as CEO. The results have been outstanding.

Patricio sold off underperforming brands, made improvements to Kraft's packaging, marketing, and operating efficiency, and paid down debt. Not only have adjusted sales improved, but Kraft demonstrated excellent pricing power in this inflationary environment.

One reason Buffett favors investing in top brands is the ability to raise prices over time to offset the long-term erosion to shareholder returns caused by inflation. In the second quarter, Kraft reported a 10% year-over-year increase in adjusted sales, completely driven by higher selling prices. 

Kraft Heinz stock has outperformed the S&P 500 in 2022

Kraft appears to be finally performing to Buffett's expectations. Under Patricio, Kraft stock is up 28% since the end of June 2019, including dividend reinvestment. That puts Kraft stock just ahead of the S&P 500's 23.4% return over that three-year period. 

Kraft stock is outperforming the market year-to-date, down 6.6% compared to the S&P 500's decline of 23.3%. Given Kraft's improved business performance, Buffett probably won't be selling out anytime soon. 

It's not too late to buy Kraft Heinz stock. The business is positioned for more growth under Patricio. The stock also pays a dividend yield of 4.77%, and trades at a delicious price-to-earnings ratio of 12.6 based on this year's earnings estimates, which is a discount to the S&P 500's forward P/E of 17. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

John Ballard has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Walmart Inc. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended The Kraft Heinz Company. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

Digital rocket on a laptop.
Broker Notes

Is the Nvidia share price on course to reach US$1,400?

You betcha, says one analyst.

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Could Nvidia become the most valuable stock on earth?

Can anything stop the Nvidia stock price?

Read more »

A group of young ASX investors sitting around a laptop with an older lady standing behind them explaining how investing works.
International Stock News

What can ASX investors learn from Warren Buffett's latest buys and sells?

We've just found out what Buffett's been buying and selling recently.

Read more »

electric vehicle such as Tesla being charged at charging station
International Stock News

Why Tesla stock tanked in January

Will the electric vehicle leader see earnings decline once again in 2024?

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
International Stock News

Will Nvidia stock be worth more than Microsoft by 2030?

The graphics giant has been growing at a much faster pace than Microsoft, but can it sustain that momentum?

Read more »

Man with hands in the middle of two items with money bags on them.
International Stock News

Stock-split watch: Is Tesla next?

Stock splits are fun. But how much substance there is in Tesla splitting its stock is debatable.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
International Stock News

Yes, Microsoft is a star AI stock, but this is what really powered its solid second-quarter results

Deep involvement with artificial intelligence (AI) has made the company popular with investors, but that isn't (yet) the top motor…

Read more »

Search toolbar with a finger pointing to it.
International Stock News

Why Alphabet stock was sliding today

Shares of the tech giant pulled back on weaker-than-expected ad revenue in its fourth-quarter report.

Read more »