We recently compiled a list of the 8 Best Value Dividend Stocks to Invest in According to Warren Buffett. In this article, we are going to take a look at where The Kraft Heinz Company (NASDAQ:KHC) stands against the other dividend stocks.
Many experienced economists and investors today take inspiration from Warren Buffett’s strategies. His focus on value investing played a key role in building his fortune. This investment philosophy involves purchasing undervalued stocks or businesses when market sentiment drives prices lower and holding them for the long term. Buffett has made some of his most successful investments by capitalizing on opportunities when others were selling out of fear.
Value investing remains one of the most widely used investment strategies, having generated substantial returns over time. A report from Bank of America highlighted its long-term success, showing that since 1926 through 2023, value stocks have delivered a total return of 1,344,600%, significantly outperforming growth stocks, which have returned 626,000% over the same period.
Also read: 8 Unstoppable Dividend Stocks to Invest in
Lowell Miller’s book, Single Best Investment, highlighted the insights of Fama and French on value investing, referencing their published works in the Journal of Finance. Here are some remarks by Nobel laureates:
“Firms that the market judges to have poor prospects, signaled by low stock prices and low price/book ratios, have higher expected stock returns . . . than firms with strong prospects.”
The book highlighted that when a growth stock does not live up to investors’ high expectations, they come to realize that its price was inflated, often resulting in a sharp decline. In contrast, value stocks, which generally have lower expectations, can exceed predictions, leading to a positive reassessment of their price. However, the book also stresses the importance of diversification, as relying too heavily on a single investment can be risky. Historically, maintaining a diversified portfolio has been a prudent approach for investors.
According to a report by BlackRock, value stocks can serve as a buffer in a shifting market environment. A recent example was the broad market downturn in 2022, where steep declines in growth stocks were somewhat balanced by smaller losses in value stocks. By definition, value stocks trade at lower prices compared to growth stocks, though the extent of this discount has varied over time.
An analysis of the broader market’s growth and value stocks suggests that valuations would need to climb by more than 40% to bring value stocks back to their long-term median levels. This indicates significant upside potential if value stocks begin to recover, particularly as high valuations in growth stocks may encourage investors to shift toward value as the market expands its focus beyond mega-cap companies. While past performance does not guarantee future results, history offers some perspective. The last time the valuation gap between the Russell Growth and Russell Value indexes was as wide as it is today—back in December 2000—value stocks went on to outperform growth stocks over the following one-, three-, and five-year periods, the BlackRock report further highlighted.
In addition to focusing on value stocks, Buffett allocates a significant portion of his investments to dividend-paying companies. By the end of the third quarter of 2024, the majority of companies in his portfolio not only distributed dividends to shareholders but also had a consistent history of maintaining and growing those payouts. In this article, we will take a look at some of the best value dividend stocks according to Warren Buffett.
Our Methodology:
For this article, we analyzed Berkshire Hathaway’s 13F portfolio as of the third quarter of 2024 and picked dividend stocks. From that list, we selected stocks that have forward price-to-earnings (P/E) ratios below 21 as of January 28. A low P/E ratio indicates that a stock or an investment is relatively undervalued in the market. The stocks are ranked in ascending order of their forward P/E ratios as of January 28. We also considered hedge fund sentiment around each stock using Insider Monkey’s data for Q3 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A closeup of an assembly line worker inspecting a newly produced jar of condiments and sauces.
The Kraft Heinz Company (NASDAQ:KHC)
Forward P/E Ratio: 9.71
The Kraft Heinz Company (NASDAQ:KHC) is an American multinational food company that specializes in a wide range of snacks and beverages. In the third quarter of 2024, the company delivered mixed results, falling short of analysts’ expectations. Revenue declined by 2.85% year-over-year to $6.38 billion. However, the company saw a modest improvement in its gross profit margin, which rose by 20 basis points to 34.2%. It is prioritizing investments in marketing, research and development, and technology to enhance consumer-driven solutions and support long-term revenue growth. These efforts are backed by its ability to optimize operations and maintain strong cash flow. In addition, the company continues to focus on expanding both its established and emerging food and beverage brands globally.
The Kraft Heinz Company (NASDAQ:KHC) was created through the merger of Kraft and Heinz, aiming to drive profitability by cutting costs. However, the integration did not unfold as expected, resulting in a leadership transition. The company has since shifted its focus to a core group of stronger-performing brands. Despite previous setbacks, Kraft Heinz has been making progress, particularly in strengthening its financial position. Since reaching its highest debt levels in 2020, the company has made substantial progress in reducing leverage, demonstrating its ability to manage current challenges and realign its business for long-term growth.
Despite ongoing challenges, income-focused investors may find reassurance in The Kraft Heinz Company (NASDAQ:KHC)’s solid cash position. In the latest quarter, the company demonstrated strong cash generation, with operating cash flow for the year rising 6.7% to $2.8 billion compared to the previous year. Free cash flow also saw a 9.7% increase, reaching $2 billion. Moreover, the company distributed $1.5 billion in dividends to shareholders over the first nine months of the year. It currently pays a quarterly dividend of $0.40 per share and has a dividend yield of 5.41%, as of January 28.
Overall KHC ranks 1st on our list of the best value stocks according to Warren Buffett. While we acknowledge the potential for KHC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than KHC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
