The Kraft Heinz Company's (NASDAQ:KHC) investors are due to receive a payment of $0.40 per share on 23rd of September. The dividend yield will be 4.1% based on this payment which is still above the industry average.
Kraft Heinz's Dividend Is Well Covered By Earnings
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, the company was paying out 129% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 61%. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.
Looking forward, earnings per share is forecast to rise by 136.0% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 52% which would be quite comfortable going to take the dividend forward.
Kraft Heinz's Dividend Has Lacked Consistency
Kraft Heinz has been paying dividends for a while, but the track record isn't stellar. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2015, the annual payment back then was $2.30, compared to the most recent full-year payment of $1.60. Doing the maths, this is a decline of about 5.1% per year. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
Dividend Growth Potential Is Shaky
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Earnings per share has been sinking by 17% over the last five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.
The Dividend Could Prove To Be Unreliable
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Kraft Heinz's payments, as there could be some issues with sustaining them into the future. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. This company is not in the top tier of income providing stocks.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 4 warning signs for Kraft Heinz (of which 1 is a bit concerning!) you should know about. Is Kraft Heinz not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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