Kraft Heinz Co. (KHC) announced on Sept. 2 that it will split into two companies, essentially unwinding the 2015 blockbuster merger of Kraft Foods Group and H.J. Heinz Company. We are changing our recommendation to “Hold” from “Buy” for low-to-medium-risk taxable portfolios until more information is available, writes Martin Fridson, editor of Forbes/Fridson Income Securities Investor.
Berkshire Hathaway Inc. (BRK.A) is KHC’s largest common shareholder, with a 27.4% stake in the company. Last month, it took a $3.8 billion write-down on its investment. Buffett’s response to the split announcement was that he was “disappointed” and it remains to be seen whether BRK will seek to reduce its position in the company. KHC’s common shares were initially down more than 7% on the news.
Kraft Heinz Co. (KHC)
While the 2015 merger did not turn out the way it was envisioned, many question if splitting KHC will address the headwinds that have confronted the company. KHC has failed to keep pace with the shift in consumer preferences toward healthier and less-processed foods, the rise in private label foods, and dietary trends.
We last reviewed the company in April 2024, changing our recommendation to “Buy” from “Hold.” The change in recommendation was based on the expectation that the company would be successful in its reorganization plans. Now, however, we believe KHC’s plan to split into two companies is an attempt to unwind the 2015 merger that saw it stumble and fail on execution. Sluggish sales remain a thorny issue, while high tariffs add further headwinds.
The company’s investment grade ratings have remained intact since 2015. Until recently, KHC had made progress toward reducing financial leverage and improving operating performance. While rating agencies have yet to comment on the split, we expect KHC’s ratings will be affirmed, but the outlook changed to Developing or Negative.
KHC’s current dividend is expected to be maintained across both companies, though individual payouts are uncertain. There is still the possibility that both new companies will fail to meet objectives, though, necessitating our ratings change.
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