Kraft Heinz Stock: Amazing Dividend Stock or Value Trap?

If you come across a falling dividend stock with a high yield, it can be challenging to decide whether it's really a good buy or if it's an investment you want to stay away from. On the one hand, the potential to collect a high yield is alluring. But on the flip side, there's usually a reason investors are bearish on the stock to begin with, which is why it's trading at a reduced valuation.

Kraft Heinz (NASDAQ: KHC) is a stock that probably stirs those kinds of questions among investors. Is it a good dividend stock to hold given its 5.7% yield, or is it merely a value trap that could fall even lower in value? To determine which side Kraft falls on, I'll take a closer look at its financials and its future growth prospects.

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What Kraft's numbers say

The big question for Kraft investors is whether the dividend is safe and sustainable. Kraft has generally not experienced challenges in staying out of the red over the years.

And in the trailing 12 months, its net income has totaled $2.7 billion on revenue of $25.4 billion for a decent profit margin of over 10%. Its diluted earnings per share over the trailing 12 months has totaled $2.19, which is higher than the rate of its annualized dividend of $1.60 per share. And that puts its payout ratio at 73% of earnings.

Its free cash flow has also totaled more than $3 billion, which has easily been enough to cover its dividend payments of $1.9 billion over the past four quarters. Both in terms of cash flow and overall profitability, Kraft's dividend does appear to be safe. But that doesn't mean there aren't other issues with the stock.

The company's growth is a big question mark

For investors, it's also important to know that the business is on a good trajectory, and its operations are growing. Unfortunately, when it comes to Kraft, growth has been a bit of a problem. Sales were down more than 6% in the company's most recent quarter, and that's been part of a troubling trend for the business.

KHC Operating Revenue (Quarterly YoY Growth) data by YCharts.

For 2025, Kraft's management expects its organic net sales to be down between 1.5% and 3.5% when compared to the previous year. The good news for income investors is that at least this type of slowdown shouldn't drastically impact its earnings. And with a reasonable payout ratio, Kraft's dividend should remain safe even amid a minor decline in its operations this year.

But given such an underwhelming outlook, it may be hard to expect the food stock to turn things around anytime soon.

Should you buy Kraft stock right now?

Kraft's stock is down more than 20% over the past 12 months, and it hasn't been this cheap in many years. At 13 times its trailing earnings, it does look like a cheap buy when compared to the average stock on the S&P 500, which trades at nearly 23 times its profits.

However, the company may need to pivot to healthier food options in order to stimulate its growth rate. While it does have many great consumer brands in its portfolio, it's clear that they are struggling. Right now, the future doesn't look terribly bright for the business.

Although the dividend does appear to be safe, that may not be enough of a reason to buy the stock today. The payout still looks to be safe, but that's about it. This isn't an amazing dividend stock to own by any stretch. Kraft needs to find a catalyst to get its business growing again. Otherwise, it may be hard to convince investors to take a chance on the stock. While its dividend yield is high, so too are the stock's losses.

At this stage, Kraft looks like a value trap, and most investors are probably better off avoiding it and pursuing other stocks instead.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.