The relatively new Kraft Heinz Company (NASDAQ:KHC) is now the fifth-largest food and beverage company in the world. The merger of the two iconic American companies has created a powerhouse with brand recognition worldwide. Now that the merger has finally happened and the new company shares are trading, I think it is worth a good look. Several new developments from the merger, along with other positives make the company one that investors should like.
The first thing to like about the company is actually something that Kraft has been doing since before the merger. Since 2012 Kraft has raised its dividend each year. Over the last year, it has paid 55 cents quarterly and recently announced the continuation of this. On top of this, post-merger the company has mentioned multiple instances that it expects to continue with increases. With a current yield of roughly 2.85%, the dividend is definitely a big positive for the shares.
Clearly earnings growth will be a big factor as to whether the company will be able to further raise the dividend. This growth will be accomplished through a number of positive plans the company has moving forward. The first and most obvious would be the synergy cost savings that are expected. In fact on an annual basis, the company plans to save an estimated $1.5B by 2017. This is a large number considering in 2014 the combined sales for the two were a little over $29B. The savings are expected to be achieved through the trimming of overlap and integration of operations between the two.
Growing sales will also be a big factor to earnings growth. The company looks to do this in a number of ways over the next couple of years. One of the largest ways would be the international expansion of the Kraft brands. Nearly all of Kraft's sales came from North America last year. Heinz, on the other hand, had well over 50% of its sales internationally. An astounding 25% of Heinz sales last year were actually from emerging markets.
(Source: Kraft Heinz)
Since Heinz has a large international presence, the expansion of the Kraft brands internationally should be somewhat easier. Looking out a couple of years, this expansion into international markets should definitely fuel sales growth for the company. This handsome potential for international growth is something to currently really like about the company.
Another way the company is looking to boost sales would be through innovation. The Heinz brands have shown this year it can do so. Of course when one thinks of Heinz the first thought would be ketchup. Piggy-backing on the overwhelming success of its ketchup, it is launching numerous other new products.
(Source: Kraft Heinz)
Innovation is an essential way for food and beverage companies to grow. Keeping up with trends and consumer tastes can of course be very rewarding. With these new launches, I believe Heinz is doing just that.
The last major positive going for the company would be its partners. With members of Berkshire Hathaway and 3G Capital sitting on the board, it is difficult to say that the company doesn't have somewhat of a dream team. The world's most renowned investor, Warren Buffett, sitting on the board is a definite positive. These two companies both have large stakes in the new entity, making it in the best interest of both that Kraft Heinz reward shareholders through higher growth in years to come. Both have exemplified through various other mergers and takeovers that they can unlock great value for shareholders. One such example would be the performance of AB InBev (NYSE:BUD) with 3G Capital as a major owner.
There is certainly a lot to like about the company currently. The current price of shares are a slightly different story. According to Marketwatch, the shares are trading at about 25.5 times earnings estimates for the year. This coupled with the fact that it's also trading at about 3x sales make the shares look fairly expensive. The expectation is for the merger be EPS accretive by 2017. Obviously with international expansion, sales will see a significant boost. So part of the overvaluation can be justified somewhat by the company's prospects over the next couple of years.
Currently there is a lot to like about The Kraft Heinz Company. With a solid dividend, synergy cost savings on the way, opportunity for big international growth, and well renowned board members, it's hard not to like the newly formed company. Although many of the things to like will not become fruitful for possibly many years, I believe the company is an excellent hold in the meantime.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Always do your own research before investing.