Kraft Heinz Faces a $7.4 Billion Impairment Charge. Is the 6.2% Yielding Stock a Value Trap or a No-Brainer Buy in August?

It's a big understatement to say that the Kraft Foods and H.J. Heinz merger has been disappointing. Since the combined company, Kraft Heinz (NASDAQ: KHC), began trading in July 2015, the shares have lost 43.4% through Aug. 14.

Including dividends, the stock returned just 2.3%. Those who invested passively in an S&P 500 index fund did much better, with the index returning 584.1% during this time.

The board of directors hired Steve Cahillane as CEO, and he started on Jan. 1. Can he turn around the company and reignite sales growth?

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Uninspiring results

So far, the results have been uninspiring. Kraft-Heinz's second-quarter sales, adjusted to remove foreign-currency translations and the impact of divestitures, dropped 1.3% year over year. Even more concerning, while higher prices added 1.3 percentage points, lower volume/changing mix subtracted 2.6 percentage points. Clearly, consumers aren't willing to pay higher prices, as this has resulted in lower demand.

Turning to operating income, it's more complicated. Kraft Heinz had an operating loss of $6.4 billion. This includes impairment charges of $7.4 billion. The year-ago period also included $9.3 billion of charges. Adding these back, the company earned $1 billion. However, that's still down more than 18% year over year.

While management noted it's a non-cash charge, it still reflects poorly on management's prior judgment. This year's charges include $2.4 billion for goodwill impairment and $4.9 billion for intangible asset impairment. Management took the former charge due to the market's assessment of Kraft Heinz's ability to achieve cash flow projections from investments in marketing, sales, and research and development (R&D). The intangible asset write-down reflects a charge primarily related to trademarks that no longer have the value management once thought they had.

Management's plan

One of CEO Cahillane's first actions was to cancel the previously announced split of the businesses into groceries and sauces/spreads. Instead, management decided to increase spending on marketing, sales, and R&D by $600 million.

This hasn't worked out, at least not yet. You can see the proof in the sales results, which have continued dropping. Additionally, management's decision to take the goodwill charge also reflects this reality.

For the year, management expects sales to drop 0.5% to 2%. While that's better than the 1.5% to 3.5% decline that it previously expected, it's hard to get excited by the outlook.

Relying on dividends?

Kraft Heinz has paid steady $0.40 quarterly dividends since 2019. However, that came after the board of directors slashed the payout from $0.625 per share.

With that kind of history and the company's losses, it's not out of the question that Kraft Heinz will cut dividends at some point. That's why I wouldn't rely on future dividends, despite the stock's high 6.3% yield.

While the stock has a price-to-sales (P/S) ratio of 1.2 versus the S&P 500's 3.8, I'd avoid Kraft Heinz's shares.

That's because the company continues to face sales and profitability challenges that could threaten its dividend. That means the company has the makings of a value trap rather than a value stock.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.